Few individuals in the sphere of financial services have their words scrutinised as closely Jamie Dimon, CEO of JP Morgan. Whether it’s on cryptocurrencies, politics or the pandemic, his words carry weight. Allow me to become the latest scrutineer of such comments.
Securities services revenue makes up about one-thirtieth of JP Morgan’s overall revenues, yet I would say the attention Dimon is giving this business is not equivalent to that fraction. Following a prolonged period of investment into the business and refined strategy, an uptick has occurred across the spectrum of securities services offerings, from custody and fund services to ETF administration.
During the bank’s fourth quarter results, Dimon piqued the interest of investors, peers and the media alike by revealing JP Morgan’s $12 billion tech bill from the past 12 months. Pressed on the bared fruit of the significant investment, Dimon and his chief financial officer – Jeremy Barnum – put the spotlight on its securities services business led by industry stalwart Teresa Heitsenrether.
“If you look at Teresa’s securities services business, it’s an interesting example of the way the investment relates to the strategy,” said Barnum.
“In that business, as you know, historically, winning new mandates, especially on services administration tended to involve significant correlated large increases in expense as you had to onboard a lot of fund accountants.
“I think a lot of the investment that we’re making there is to make that business a little bit more scalable in that respect so that when we win new business, it’s a little bit more accretive. That’s kind of an interesting example of that tech investment that produces more revenue.
“I would describe it as investment that means that when we win the revenue, it’s more profitable…at the same time, we’re also building out some really great capabilities in there in terms of data and stuff like that, which maybe will help us win more mandates.”
As for Dimon, his final comment on a call – at a time where some brave soul was probably tapping their watch in his direction – was dedicated to securities services. The custody business has leveraged the technology and capabilities of its markets franchise and has subsequently put itself in a position to serve increasingly complex portfolios across alternatives, private assets and derivatives. The work has resulted in extended mandates with its own asset management business and BlackRock, two significant moves in the space.
“I know we got to end this call,” he said, before name-checking Heitsenrether and handing her credit. “We now are using JP Morgan’s investment banking derivative capability to help clients use derivatives for custody to value them and stuff like that. A lot of people simply can’t do that. And of course, believe it or not, a lot of portfolios now, they’re using more and more what you and I call derivatives as part of the portfolio management. That costs time. It costs money. It’s on the cloud. It’s hugely valuable to Teresa having a competitive advantage.”
In the world of custody, we’ve seen the recent ascension of JP Morgan and Citi to rival the previous two-horse race of BNY Mellon and State Street at the top of the assets league table to create a four-way jostle. This was evident in BlackRock’s redesignation of its US-domiciled ETF assets towards the end of last year where the two investment banking giants captured the lion’s share of the mandate.
When you lift the hood on JP Morgan’s business and consider Heitsenrether’s overall strategy and the work of the likes of Tim Fitzgerald, global head of custody and fund services, and the recently retired global head of alternative investment services, Joan Kehoe, you can see the results of the work which has been put in.
Scale, reduced operating margin and technology investments – both internally and externally – have led to new mandates, extensions of existing deals and the capture of talent across the world, in a recent hiring spree.
As for reading too much into Dimon’s and Barnum’s comments, I don’t think its sensationalist to note that the words were the final remarks on a call to wrap up 2021’s performance amid a decline in revenues and dialled-in investors honing in on the significant $12 billion tech expenditure.
While BNY Mellon and State Street’s C-level execs will always talk about their respective custody businesses – being at the core of what they do – when Dimon or Citi’s Jane Fraser do so, it’s as much about the fact they’ve covered it amid discussions of the broader investment bank, retail and payments business, as it is about what they actually said.