Jamie Dimon’s annual letter to JPMorgan shareholders for the year ended December 31, 2015.
Dear Fellow Shareholders,
Last year — in fact, the last decade — was an extraordinary time for our company. We managed through the financial crisis and its turbulent aftermath while never losing sight of the reason we are here: to serve our clients, our communities and countries across the globe and, of course, to earn a fair profit for our shareholders. All the while, we have been successfully executing our control and regulatory agenda and continuing to invest in technology, infrastructure and talent — critical to the future of the company. And each year, our company has been getting safer and stronger. We continue to see exciting opportunities to invest for the future and to do more for our clients and our communities — as well as continue to support the growth of economies around the world.
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I feel enormously blessed to work for this great company and with such talented employees. Our management team and employees have built an exceptional organization that is one of the most trusted and respected financial institutions in the world. It has been their dedication, fortitude and perseverance that made this possible. And it fills me with tremendous pride.
JPMorgan earned a record $24.4 billion in net income on revenue of $96.6 billion in 2015. In fact, we have delivered record results in the last five out of six years, and we hope to continue to deliver in the future. Our financial results reflected strong underlying performance across our businesses, and, importantly, we exceeded all our major financial commitments — balance sheet optimization, capital deployment, global systemically important bank (GSIB) surcharge reduction and expense cuts.
While we did produce record profits last year, our returns on tangible common equity have been coming down, mostly due to higher capital requirements, higher control costs and low interest rates. Our return on tangible common equity was 13% last year, though we still believe that we will be able to achieve, over time, returns of approximately 15%. We still don’t know the final capital rules, which could have additional negative effects, but we do believe that the capital requirements eventually will be offset by optimizing our use of capital and other precious resources, by realizing market share gains due to some competitors leaving certain businesses, and by implementing extensive cost efficiencies created by streamlining and digitizing our processes. I will discuss some of these efforts later on in this letter.
We continued to deliver for our shareholders in 2015. The table above shows the growth in tangible book value per share, which we believe is a conservative measure of value. You can see that our tangible book value per share has grown far more than that of the Standard & Poor’s 500 Index (S&P 500) in both time periods. For Bank One shareholders since March 27, 2000, the stock has performed far better than most financial companies and the S&P 500. We are not proud of the fact that our stock performance has only equaled the S&P 500 since the JPMorgan Chase & Co. merger with Bank One on July 1, 2004 and essentially over the last five to 10 years. On a relative basis, though, JPMorgan Chase stock has far outperformed the S&P Financials Index and, in fact, has been one of the best performers of all banks during this difficult period. The details are shown on the table on the following page.
Many of the legal and regulatory issues that our company and the industry have faced since the Great Recession have been resolved or are receding, which will allow the strength and quality of our underlying business to more fully shine through.
In this letter, I will discuss the issues highlighted below — which describe many of our successes and opportunities, as well as our challenges and responses. The main sections are listed below, and, unlike prior years, we have organized much of this letter around some of the key questions we have received from shareholders and other interested parties.
JPMorgan’s Franchises Are Strong – And Getting Stronger
When I travel around the world, and we do business in over 100 countries, our clients – who are big companies to small businesses, investors and individuals, as well as countries and their sovereign institutions – are almost uniformly pleased with us. In fact, most cities, states and countries want more of JPMorgan Chase. They want us to bring more of our resources – our financial capabilities and technology, as well as our human capital and expertise – to their communities. While we do not know what the next few years may bring, we are confident that the needs of our clients around the world will continue to grow and that our consistent strategy of building for the future and being there for our clients in good times and bad has put us in very good stead. Whatever the future brings, we will face it from a position of strength and stability.
Because our business leaders do such a good job describing their businesses (and I strongly urge you to read their letters on pages 52–72 in this Annual Report), it is unnecessary for me to cover each in detail here, other than to answer the following critical questions.
How do you compare your franchises with your peers? What makes you believe your businesses are strong?
Virtually all of our businesses are close to best in class, in overhead ratios and, more important, in return on equity (ROE), as shown on the chart on page 8. Of even more relevance, we have these strong ratios while making sizable investments for the future (which we have reported on extensively in the past and you can read more about in the CEO letters). It is easy to meet short-term targets by skimping on investments for the future, but that is not our approach for building the business for the long term.
We are deeply aware that our clients choose who they want to do business with each and every day, and we are gratified that we continue to earn our clients’ business and their trust. If you are gaining customers and market share, you have to be doing something right. The chart below shows that we have been meeting this goal fairly consistently for 10 years.
Good businesses also deeply care about improving customer satisfaction. As shown above, you can see that our Chase customer satisfaction score continues to rise. In addition, our Commercial Banking satisfaction score is among the highest in the industry in terms of customer loyalty. In Asset Management, where customers vote with their wallet, JPMorgan Funds finished second in long-term net flows among all fund complexes.
Later on in this letter, I will describe our fortress balance sheet and controls, as well as the discipline we have around risk management. I will also talk more about our employees, some exciting new opportunities – mostly driven by innovative technologies – and our ongoing support for our communities and our country. It is critical that we do all of these things right to maintain the strength of our company.
We Must And Will Protect Our Company And Those We Serve
In support of our main mission – to serve our clients and our communities – there is nothing more important than to protect our company so that we are strong and can continue to be here for all of those who count on us. We have taken many actions that should give our shareholders, clients and regulators comfort and demonstrate that our company is rock solid.
The actions we have taken to strengthen our company.
In this section, we describe the many actions that we have taken to make our company stronger and safer: our fortress balance sheet with enhanced capital and liquidity, our ability to survive extreme stress of multiple types, our extensive de-risking and simplification of the business, and the building of fortress controls in meeting far more stringent regulatory standards. Taken together, these actions have enabled us to make extraordinary progress toward reducing and ultimately eliminating the risk of JPMorgan Chase failing and the cost of any failure being borne by the American taxpayer or the U.S. economy.
You say you have a “fortress balance sheet.” What does that mean? Can you handle the extreme stress that seems to happen around the world from time to time?
Nearly every year since the Great Recession, we have improved virtually every measure of financial strength, including many new ones. It’s important to note as a starting point that in the worst years of 2008 and 2009, JPMorgan Chase did absolutely fine – we never lost money, we continued to serve our clients, and we had the wherewithal and capability to buy and integrate Bear Stearns and Washington Mutual. That said, we nonetheless recognize that many Americans did not do fine, and the financial crisis exposed weaknesses in the mortgage market and other areas. Later in this letter, I will also describe what we are doing to strengthen JPMorgan Chase and to help support the entire economy.
The chart on page 12 shows many of the measures of our financial strength – both from the year preceding the crisis and our improvement in the last year alone.
In addition, every year, the Federal Reserve puts all large banks through a very severe and very detailed stress test.
Among other things, last year’s stress test assumed that unemployment would go to 10.1%, housing prices would fall 25%, equity markets would decline by nearly 60%, real gross domestic product (GDP) would decline 4.6%, credit spreads would widen dramatically and oil prices would rise to $110 per barrel. The stress test also assumed an instantaneous global market shock, effectively far worse than the one that happened in 2009, causing large trading losses. It also assumed the failure of the largest counterparty (this is meant to capture the failure of the global bank that you have the most extensive derivative relationship with; e.g., a Lehman-type event), which would cause additional losses. The stress test assumed that banks would not stop buying back stock – therefore depleting their capital – and would continue to grow dramatically. (Of course, growing dramatically and buying back stock if your bank were under stress would be irresponsible – and is something we would never do.) Under this assumed stress, the Federal Reserve estimates that JPMorgan Chase would lose $55 billion pre-tax over a nine-quarter period, an amount that we would easily manage because of the strength of our capital base. Remember, the Federal Reserve stress test is not a forecast – it appropriately assumes multiple levels of conservatism and that very little mitigating action can be taken. However, we believe that if the stress scenario actually happened, we would incur minimal losses over a cumulative ninequarter period because of the extensive mitigating actions that we would take. It bears repeating that in the actual Great Recession, which was not unlike last year’s stress test, JPMorgan Chase never lost money in any quarter and was quite profitable over the nine-quarter period.
The stress test is extremely severe on credit.
The 2015 Comprehensive Capital Analysis and Review (CCAR), or stress test, projected credit losses over a nine-quarter period that totaled approximately $50 billion for JPMorgan Chase, or 6.4% of all our loans. This is higher than what the actual cumulative credit losses were for all banks during the Great Recession (they were 5.6%), and our credit book today is materially better than what we had at that time. The 2015 CCAR losses were even with the actual losses for banks during the worst two years of the Great Depression in the 1930s (6.4%).
The stress test is extremely severe on trading and counterparty risk.
Our 2015 CCAR trading and counterparty losses were $24 billion. We have two comparisons that should give comfort that our losses would never be this large.
First, recall what actually happened to us in 2008. In the worst quarter of 2008, we lost $1.7 billion; for the entire year, we made $6.3 billion in trading revenue in the Investment Bank, which included some modest losses on the Lehman default (one of our largest counterparties). The trading books are much more conservative today than they were in 2008, and at that time, we were still paying a considerable cost for assimilating and de-risking Bear Stearns.
Second, we run hundreds of stress tests of our own each week, across our global trading operations, to ensure our ability to withstand and survive many bad and extreme scenarios. These scenarios include events such as what happened in 2008, other historically damaging events and also new situations that might occur. We manage our company so that even under the worst market stress test conditions, we would almost never bear a loss of more than $5 billion (remember, we earn approximately $10 billion pre-tax, pre-provision each quarter). We recognize that on rare occasions, we could experience a negative significant event that could lead to our having a poor quarter. But we will be vigilant and will never take such a high degree of risk that it jeopardizes the health of our company and our ability to continue to serve our clients. This is a bedrock principle. Later in this letter, I will also describe how we think about idiosyncratic geopolitical risk.
And the capital we have to bear losses is enormous.
We have an extraordinary amount of capital to sustain us in the event of losses. It is instructive to compare assumed extreme losses against how much capital we have for this purpose.
You can see in the table below that JPMorgan Chase alone has enough loss absorbing resources to bear all the losses, assumed by CCAR, of the 31 largest banks in the United States. Because of regulations and higher capital, large banks in the United States are far stronger. And even if any one bank might fail, in my opinion, there is virtually no chance of a domino effect. Our shareholders should understand that while large banks do significant business with each other, they do not directly extend much credit to one other. And when they trade derivatives, they mark-to market and post collateral to each other every day.
See full letter below.