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JPMorgan Chase & Co.
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== Business model, Macroeconomic factors & Potential Risks == '''Jamie Dimon Letter to shareholders 2023:''' “The Firm continued to demonstrate strong financial performance in 2022, building upon its momentum from prior years…” “…That said, our clients and customers, employees and communities continue to face headwinds coming from geopolitical tensions including the war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation that is eroding purchasing power and has pushed interest rates higher and unprecedented quantitative tightening. We have also seen a small number of bank failures and instability in pockets of our industry. While we are committed to doing our part in times of stress, we strongly believe that America’s financial system is among the best in the world…” “…the global banking system has strong credit, plenty of liquidity, and capital. Nonetheless, we remain vigilant and are prepared for whatever happens so we can work with our customers, clients and communities around the world across a broad range of economic environments, while remaining true to our fundamental business principles and commitment to building long-term value for our shareholders.” - Letter to shareholders in proxy statement, April 4th 2023, from Jamie Dimon (CEO/Chair) & Stephen B. Burke (Lead Director)<ref>chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/<nowiki>https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/investor-relations/documents/proxy-statement2023.pdf</nowiki></ref> From this recent letter to shareholders on behalf of the top executives at JPMorgan Chase & Co it can be seen that there are many possible risks that the company faces. Most of these risks are those on a global and macroeconomic scale; faced by all firms. Some risks however are independent to JPMorgan Chase & Co, which will be covered in this section. This section also covers how JPMorgan Chase & Co manages their risks, their business model, and the current macroeconomic situation they face. '''Business Model of JPMorgan Chase & Co:''' JPMorgan Chase & Co is the largest bank in America, with a balance sheet boasting over $3.7 Trillion of assets.<ref name=":5">chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/<nowiki>https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/investor-relations/documents/quarterly-earnings/2023/2nd-quarter/1f617eea-d92b-46c4-8b73-4234a60f83a9.pdf</nowiki></ref> The bank is a one-stop shop for nearly all types of financial services to all types of consumers. This includes the 4 main segments: Consumer & Community Banking (CCB), Corporate & Investment Banking (CIB), Commercial Banking (CB), and Asset & Wealth Management (AWM). These respectively serve the average individual, small businesses, large businesses and institutions, midsize businesses, and wealthy individuals. This demonstrates how JPMorgan Chase & Co is a well diversified financial institution and their numbers reflect this, with each segment bringing in a significant portion of revenue on average. However, their two biggest segments tend to consistently be the CCB and CIB, which bring in over 50% of profits on average.<ref name=":5" /> Due to being a diverse financial institution, JPMorgan Chase & Co have been successful at thriving during difficult economic times such as the 2008 Financial Crisis, the Covid-19 pandemic, and currently during the brink of recession and shifting tides within the global financial system. Aside from offering highly diversified services, a quintessential reason for the success of the mega bank is due to its “Fortress Balance Sheet”. '''Fortress Balance Sheet:''' The centre of CEO Jamie Dimon’s risk management strategy for JPMorgan Chase & Co is the concept of the Fortress Balance Sheet - a large cushion of assets and capital to protect consumers deposits if the bank gets hit by unexpected losses. This currently stands at nearly $400 Billion, making the bank highly liquid, and making a run on the bank virtually impossible according to the CEO<ref name=":5" />. This security is particularly attractive in the current economic climate following the multiple U.S. bank failures in the past year that have occured due to bad risk management practices. Depositors have flocked towards the biggest and safest banks as a result. Increased yields on these deposits as a result of rising interest rates have contributed greatly towards the 67% increase in net income seen during 2Q23 for JPMorgan Chase & Co. This practice of strong risk management made the bank emerge victorious in 2008 and put them in a position to help the U.S. government by acquiring 2 failing banks - Bear Sterns and Washington Mutual. Similarly in May 2023 they have acquired the failing bank First Republic Bank, which has already contributed to over $2 Billion in profit this quarter for the firm. '''Market & Macroeconomic outlook (2Q23):''' The past year has been one of many significant shifts in the global financial system. We have seen multiple massive bank failures within the U.S. starting with Silicon Valley Bank and Signature Bank, and spreading recently to First Mutual Bank. The main reason for these failures has been the constant interest rate hikes imposed by the Federal Reserve, the central bank of the United States. As a result of these hikes, banks that were holding long-term assets lost value rapidly. Furthermore, the failed banks mentioned had a large percentage of their deposits uninsured which led to panic amongst depositors and ultimately a large concentrated withdrawal of money that could not be dealt with as the cash had been tied in long-term assets that were losing value (such as 10-year treasuries and mortgages). Despite this, JPMorgan Chase & Co reported one of their best quarters ever with sky high profits. As the bank is a massive lender, it has profited from increased yields as a result of the hikes in interest rates. However, we have seen that their Corporate & Investment Banking segment has reported decreases in earnings this quarter, with a 6% drop in revenue from M&A and 10% in trading from the previous year. Revenue from investment banking and trading operations are down across the sector. This may be a risk to consider before investing in the bank as uncertainty with interest rates continues, and the Federal Reserve progresses with its goals of Quantitative Tightening. “The uncertainty on the Federal Reserve’s stance on interest rate hikes has been a large driver of a fall in deal activity as it makes it tricky to establish a reliable discount rate to value companies by.” said Sandy Pomeroy, senior portfolio manager of the Neuberger Berman equity income fund. Globally, the total deal value of mergers and acquisitions fell about 39% during the first half of this year compared with the same period last year. Total deal value for initial public offerings was down 32%.<ref>https://dealogic.com/insight/ma-highlights-fy22/</ref> '''Risks:''' Here I highlight some possible risks faced that are unique to JPMorgan Chase & Co, and which may affect stock price negatively in the future. # Alleged links to criminal activity - the bank has been accused by multiple sources of being involved with and facilitating the activities of Jeffrey Epstein, including human trafficking. JPMorgan Chase & Co has already agreed to pay $290 Million to settle a lawsuit on behalf of the victims.<ref>https://www.ft.com/content/54cb549c-c379-4a2f-87f7-b2454f0de393</ref> The U.S. Virgin Islands also filed a lawsuit last year related to the topic, seeking a further $190 Million in settlement. Aside from the monetary harm this would cause the bank, this may lead to a greater reputational damage as JPMorgan Chase & Co publicly prides itself on ‘being a force of good’ according to CEO Jamie Dimon. # The ‘too big to fail’ hypothesis - JPMorgan Chase & Co has been accused of being an institution that is deemed ‘too big to fail’, due to its status as the largest U.S. bank. The question of monopolistic practices comes into play as the bank has repeatedly bypassed constitutional laws in this domain when it acquired Washington Mutual, Bear Sterns, and recently First Republic Bank. This is because the law states that a bank that holds over 10% of the deposits from U.S. customers is not allowed to acquire other banks. # Succession of CEO position - Jamie Dimon, the current CEO, has been with JPMorgan Chase & Co since 2005. Many consider him to be the engine for the wild success of the firm over the last two decades, thus his name has become synonymous with the bank. This calls into question the uncertainty of how markets would react were he to step down for any reason. Currently Daniel Pinto, current COO is next in line to take the position.<ref>chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/<nowiki>https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/investor-relations/documents/proxy-statement2023.pdf</nowiki></ref>
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