London — Jamie Dimon appears restless. JPMorgan Chase’s CEO is imploring investment bankers — those most tireless of salespeople — to ring him up and pitch M&A ideas. It’s the clearest indication yet that the biggest US bank would prefer not to sit on its excess capital.
That’s a nice problem to have, but one the lender is struggling to solve. The worry is that this pushes it towards a transaction at any cost.
Barred by regulators from buying back stock because of the pandemic and from acquiring a deposit-taking institution in the US because of its size, the Wall Street giant could look to expand in commercial banking outside its domestic market.
When asked if he’d take a look at a European lender, Dimon has said — correctly — that it makes little sense for the world’s most profitable bank to add branches in such a fiercely competitive market, where returns are barely half what JPMorgan makes.
Instead, he’s reportedly looking at starting a digital bank in the UK. He may even try to buy an startup British challenger, Starling Bank, according to some press reports. But that would be small fry.
In Asia, acquiring a lender such as Standard Chartered might propel JPMorgan into higher-growth emerging markets, but taking on the balance sheet risk and the difficulty in integrating vastly different business cultures would be hard at the best of times. The pandemic just adds to the perils.
Elsewhere, there’s not much point expanding JPMorgan’s capital-intensive investment banking businesses. There’s only so much growth the firm can tap in to to put its abundant reserves to work. Over the next year, investment bank activity is expected to shrink after a blockbuster 2020.
While the industry remains fragmented, JPMorgan’s dominant trading unit already has an outsize share of many markets. Hedge funds and other big clients might not be so keen on yet more exposure to one firm.
Fintech and asset management
That leaves Dimon with two natural areas of expansion: fintech and asset management. The pandemic has accelerated the shift to digital payments, a business Dimon regrets not having built up sooner. Unfortunately for him, soaring fintech valuations mean large acquisitions would be expensive. Shares in Square, for example, have jumped more than fivefold since March. PayPal Holdings’s 78% price rise since February and JPMorgan’s 11% decline has closed the valuation gap between the two from about $285bn to roughly $120bn.
Better to wait for the reopening of economies and see whether there’s a readjustment of prices among payment providers.
Asset management valuations might be more attractive. Prices aren’t far off their five-year average, according to Bloomberg Intelligence, even after Morgan Stanley’s Eaton Vance acquisition and Macquarie Group’s purchase of Waddell & Reed Financial, which both pushed Bloomberg Intelligence’s forward price-earnings multiple for large-cap asset managers up to about 15.6 times.
For JPMorgan’s $2.6-trillion asset manager, smaller acquisitions may be easier than adding real scale. It could expand its private-market business, a pocket of growth as yields remain depressed. Or it could target passive investment. The bank only ranks 10th in exchange-trade funds in the US. Société Générale wants to sell its Lyxor fund manager, which runs about $180bn and has about 7% of the European fund exchange-traded fund (ETF) market. While that might be nice to have, it wouldn’t be a big enough deal to solve Dimon’s capital problem.
The trouble for JPMorgan — now outside the top-five asset managers — is that there are few feasible takeovers that would put it in the top three, other than State Street. Many of the bigger managers are either privately owned or part of larger companies.
It’s not clear they would be for sale at a compelling price. Taking over State Street would put JPMorgan on the ETF map alongside Vanguard and BlackRock, though regulators may object.
With three large mergers under his belt as CEO, Dimon knows what deal-making entails. The lure of sealing another one before his eventual retirement shouldn’t cloud his better judgment.
Bloomberg
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