Bank investors face a new ‘black box’ dilemma

There are few more astute communicators on Wall Street than Jamie Dimon. Unlike many of his counterparts, the New York native is ready to speak his mind and can speak clearly, delving into the vernacular so easily that he sometimes sounds more like a talk show host. of sports radio than to the boss of the biggest American. bank by assets.

But some topics are a little too complicated for even the CEO of JPMorgan Chase to turn to his advantage. Like other stalwarts of the banking establishment these days, he’s making fateful decisions about how to respond to a new generation of fintech competitors — and explaining his tech spending to outsiders is proving tricky.

Dimon’s struggles surfaced a few days ago when JPMorgan released its fourth quarter results. As usual, it made big money – a record $48.3 billion last year. The bank also clarified that it was not standing still. He said he would increase investments in technology, marketing, new businesses and additional staff by 30% this year to $15 billion. Technology spending of all kinds is expected to total $12 billion.

The catch is that all that spending could help push the bank’s spending up 8%, JPMorgan said, threatening its ability to meet profitability targets for this year and possibly next. On a call with Wall Street investment analysts, Dimon was pressed for details on what kind of hit the bank could expect from the big money it throws into technology.

Dimon predicted that JPMorgan would gain market share in virtually every business, but acknowledged that it would take time to fully understand the impact of its technology spending. For example, he said the bank expected to save $30-40 million per year by moving card operations from a central facility to the cloud, but he maintained that the main benefit of this move would be the improved capabilities – from eliminating fraud to making more targeted offers to customers.

Investors reacted cautiously. Shares of JPMorgan – which have roughly doubled during the pandemic – lost more than a tenth of their value days after the company’s earnings call. Mike Mayo, a Wells Fargo analyst who had endorsed JPMorgan shares for seven years, downgraded the stock, saying the lack of clarity on what the bank expected from its investments raised the possibility that it was wasting money. money without outside investors being able to say what was happening.

“Investing in banks is always like investing in a black box – it’s a different shade of gray leading to black,” says Mayo. “In JPMorgan’s case, it must have been too dark a gray for our comfort zone.”

The irony of Mayo’s criticism is that he recognizes that Dimon and bankers like him must act quickly to modernize their operations or risk seeing more banking functions migrate to fintech and non-bank competitors. He’s just worried about the transparency of the process.

“It used to be Jamie Dimon against the banks, now it’s Jamie Dimon against the world,” Mayo says. “It sends a signal that no one will spend more than JPMorgan. It’s Jamie Dimon’s way of saying, ‘I don’t blink.’ »

JPMorgan’s size and financial strength will help. While fintechs only need to focus on the coolest technology, traditional banks like Dimon must simultaneously battle their sophisticated new challengers and maintain the legacy IT systems their customers still rely on. JPMorgan says half of its $12 billion technology budget is needed to run the bank and the other half to change it. Add it up: that’s two companies.

“The problem is that a lot of their operations are running on old tools — old hardware, old software,” says Diane Glossman, a longtime Wall Street banking analyst with a particular interest in back-office operations. . “As a result, a very significant portion of their technology spending goes into keeping the wheels on the cars.”

For his part, Dimon displayed his usual confidence as he discussed his investment plans this month, saying he would need to “spend a few bucks” to beat competitors old and new. At 65 — and with a record of delivering often more than he promised — Dimon looks set to hang around for the few years it will take to see if his tech spending strategy is on track.

For the rest of us, that means investing in banks is only going to get harder. It will no longer be enough simply to know whether management is able to assess credit risk, allocate capital or inspire sales forces. Bankers are becoming software engineers these days, and it may be a while before we know how many of them are up to it.

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Robert D. Coleman