Excerpts from annual shareholder letter by Jamie Dimon, chairman and chief executive of JP Morgan Chase:

Across the globe, 2022 was another year of significant challenges: from a terrible war in Ukraine and growing geopolitical tensions — particularly with China — to a politically divided America. Almost all nations felt the effects of global economic uncertainty, including higher energy and food prices, mounting inflation rates and volatile markets, and, of course, COVID-19’s lingering impacts. While all these experiences and associated turmoil have serious ramifications on our company, colleagues, clients and the countries in which we do business, their consequences on the world at large — with the extreme suffering of the Ukrainian people and the potential restructuring of the global order — are far more important.

As these events unfold, America remains divided within its borders, and its global leadership role is being challenged outside of its borders. Nevertheless, this is the moment when we should put aside our differences and work with other Western nations to come together in defense of democracy and essential freedoms, including free enterprise. During other times of great crisis, we have seen America, in partnership with other countries around the globe, unite for a common cause. This is that moment again, when our country needs to work across public and private sectors to lead while improving American competitiveness — which also means re-establishing the American promise of providing equal access to opportunity for all. JPMorgan Chase, a company that historically has worked across borders and boundaries, will do its part to ensure the global economy is safe and secure.

The $JPM Annual Report is now available.

— J.P. Morgan (@jpmorgan) April 4, 2023

In spite of the unsettling landscape, 2022 was somewhat surprisingly another strong year for JPMorgan Chase, with the firm generating record revenue for the fifth year in a row, as well as setting numerous records in each of our lines of business. We earned revenue in 2022 of $132.3 billion¹ and net income of $37.7 billion, with return on tangible common equity (ROTCE) of 18%, reflecting strong underlying performance across our businesses. We also maintained our quarterly common dividend of $1.00 per share and continued to reinforce our fortress balance sheet. We grew market share in several of our businesses and continued to make significant investments in products, people and technology while exercising strict credit discipline. In total, we extended credit and raised capital of $2.4 trillion for our consumer and institutional clients around the world.

I remain proud of our company’s resiliency and of what our hundreds of thousands of employees around the world have achieved, collectively and individually. Throughout these challenging past few years, we never stopped doing all the things we should be doing to serve our clients and our communities.

Adhering to our basic principles and strategies (see sidebar on Steadfast Principles below) allows us to drive good organic growth and properly manage our capital (including dividends and stock buybacks), as we have consistently demonstrated for decades. Our performance results are shown in the charts below, which illustrate how we have grown our franchises, how we compare with our competitors and how we look at our fortress balance sheet. I invite you to peruse them at your leisure. In addition, I urge you to read the CEO letters in this Annual Report, which will give you more specific details about our businesses and our plans for the future.

As you know, we are champions of banking’s essential role in a community — its potential for bringing people together, for enabling companies and individuals to attain their goals, and for being a source of strength in difficult times. As I often remind our employees, the work we do matters and has impact. We help people and institutions finance and achieve their aspirations, lifting up individuals, homeowners, small businesses, larger corporations, schools, hospitals, cities and countries in all regions of the world.

CLIMATE COMPLEXITY AND PLANNING

The window for action to avert the costliest impacts of global climate change is closing. At the same time, the ongoing war in Ukraine is roiling trade relations across Europe and Asia and redefining the way countries and companies plan for energy security. The need to provide energy affordably and reliably for today, as well as make the necessary investments to decarbonize for tomorrow, underscores the inextricable links between economic growth, energy security and climate change. We need to do more, and we need to do so immediately.

To expedite progress, governments, businesses and non-governmental organizations need to align across a series of practical policy changes that comprehensively address fundamental issues that are holding us back. Massive global investment in clean energy technologies must be done and must continue to grow year-over-year.

At the same time, permitting reforms are desperately needed to allow investment to be done in any kind of timely way. We may even need to evoke eminent domain – we simply are not getting the adequate investments fast enough for grid, solar, wind and pipeline initiatives. Policies like the Bipartisan Infrastructure Law, the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, and the Inflation Reduction Act (IRA) — that hold the potential to unlock over $1 trillion in clean technology development — need to be implemented effectively. The upside is undeniable: Widespread investing across the private sector will aid domestic manufacturing, invigorate research and development in green innovation, help create resilient supply chains, lift up local economies and build the U.S. clean energy workforce by up to 9 million jobs over the next decade. While major advances have been made in the last few years on technology to help this cause, we are hopeful that the great American innovation machine (most advancements will ultimately come from the huge capabilities and capital of America’s largest companies) will find the additional technologies that are desperately needed. There is a downside – massive, inefficient and malinvestment of capital. I talk more about this in the last section on public policy.

Polarization, paralysis and basic lack of analysis cannot keep us from addressing one of the most complex challenges of our time. Diverse stakeholders need to come together, seeking the best answers through engagement around our common interest. Bolstering growth must go hand in hand with both securing an energy future and meeting science-based climate targets for future generations.

Market volatility, geopolitical tensions and economic opportunity. Jamie Dimon discusses supporting customers and clients in good and challenging times in his annual letter https://t.co/VEDKqaCpy9 pic.twitter.com/sfnlnsrqXJ

— Chase (@Chase) April 4, 2023

AI, DATA AND OUR JOURNEY TO THE CLOUD

Artificial intelligence (AI) is an extraordinary and groundbreaking technology. AI and the raw material that feeds it, data, will be critical to our company’s future success — the importance of implementing new technologies simply cannot be overstated. We already have more than 300 AI use cases in production today for risk, prospecting, marketing, customer experience and fraud prevention, and AI runs throughout our payments processing and money movement systems across the globe. AI has already added significant value to our company. For example, in the last few years, AI has helped us to significantly decrease risk in our retail business (by reducing fraud and illicit activity) and improve trading optimization and portfolio construction (by providing optimal execution strategies, automating forecasting and analytics, and improving client intelligence).

We currently have over 1,000 people involved in data management, more than 900 data scientists (AI and machine learning (ML) experts who create new models) and 600 ML engineers (who write the code to put models in production). This group is focused on AI and ML across natural language processing, time series analysis and reinforcement learning to name a few. We’re imagining new ways to augment and empower employees with AI through human-centered collaborative tools and workflow, leveraging tools like large language models, including ChatGPT.

We also have a 200-person, top-notch AI research group looking at the hardest problems and new frontiers in finance. We were recently ranked #1 on the Evident AI Index, the first public benchmark of major banks on their AI maturity. We take the responsible use of AI very seriously and have an interdisciplinary team of ethicists helping us prevent unintended misuse, anticipate regulation, and promote trust with our clients, customers and communities. AI and data use is complex; it must be done following the laws of the land. But it is an absolute necessity that we do it both for the benefits I just described and, equally, for the protection of the company and the financial system – because you can be certain that the bad guys will be using it, too.

All of our technology groups firmwide work together in a flywheel of innovation and deliver state-of-the-art improvements. We are proud that our AI teams have contributed top-quality novel research and compelling solutions that are transforming more and more business cases every day.

AI is inextricably linked with cloud-based systems, whether public or private, and digital capabilities. Our company needs the cloud for its on-demand compute capacity, flexibility, extensibility and speed. Native cloud-based approaches will ultimately be faster, cheaper and aligned with the newest AI techniques, and they will give us easy access to constantly evolving developer tools.

We have spent over $2 billion building new, cloud-based data centers and are working to modernize a significant portion of our applications (and their related databases) to run in both our public and private cloud environments. To date, we have migrated approximately 38% of our applications to the cloud, meaning over 50% of our application portfolio (this includes third-party, cloud-based applications) is running on modern environments.

This journey to the cloud is hard work but necessary. Unlocking the full potential of the cloud and nearly 550 petabytes of data will require replatforming (putting data in a cloud-eligible format) and refactoring (i.e., rewriting) approximately 4,000 applications. This effort will involve not just the 57,000 employees we have in technology but the dedicated time of firmwide management teams to help in the process.

BANKING TURMOIL AND REGULATORY GOALS

The recent failures of Silicon Valley Bank (SVB) in the United States and Credit Suisse in Europe, and the related stress in the banking system, underscore that simply satisfying regulatory requirements is not sufficient. Risks are abundant, and managing those risks requires constant and vigilant scrutiny as the world evolves. Regarding the current disruption in the U.S. banking system, most of the risks were hiding in plain sight. Interest rate exposure, the fair value of held-to-maturity (HTM) portfolios and the amount of SVB’s uninsured deposits were always known – both to regulators and the marketplace. The unknown risk was that SVB’s over 35,000 corporate clients – and activity within them – were controlled by a small number of venture capital companies and moved their deposits in lockstep. It is unlikely that any recent change in regulatory requirements would have made a difference in what followed. Instead, the recent rapid rise of interest rates placed heightened focus on the potential for rapid deterioration of the fair value of HTM portfolios and, in this case, the lack of stickiness of certain uninsured deposits. Ironically, banks were incented to own very safe government securities because they were considered highly liquid by regulators and carried very low capital requirements. Even worse, the stress testing based on the scenario devised by the Federal Reserve Board (the Fed) never incorporated interest rates at higher levels. This is not to absolve bank management – it’s just to make clear that this wasn’t the finest hour for many players. All of these colliding factors became critically important when the marketplace, rating agencies and depositors focused on them.

As I write this letter, the current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come. But importantly, recent events are nothing like what occurred during the 2008 global financial crisis (which barely affected regional banks). In 2008, the trigger was a growing recognition that $1 trillion of consumer mortgages were about to go bad – and they were owned by various types of entities around the world. At that time, there was enormous leverage virtually everywhere in the financial system. Major investment banks, Fannie Mae and Freddie Mac, nearly all savings and loan institutions, off-balance sheet vehicles, AIG and banks around the world – all of them failed. This current banking crisis involves far fewer financial players and fewer issues that need to be resolved.

These failures were not good for banks of any size.

Any crisis that damages Americans’ trust in their banks damages all banks – a fact that was known even before this crisis. While it is true that this bank crisis “benefited” larger banks due to the inflow of deposits they received from smaller institutions, the notion that this meltdown was good for them in any way is absurd.

Let’s be very thoughtful in our reaction to recent events.

While this crisis will pass, lessons will be learned, which will result in some changes to the regulatory system. However, it is extremely important that we avoid knee-jerk, whack-a-mole or politically motivated responses that often result in achieving the opposite of what people intended. Now is the time to deeply think through and coordinate complex regulations to accomplish the goals we want, eliminating costly inefficiencies and contradictory policies. Very often, rules are put in place in one part of the framework without appreciating their consequences in combination with other regulations. America has had, and continues to have, the best and most dynamic financial system in the world – from various types of investors to its banks, rule of law, investor protections, transparency, exchanges and other features. We do not want to throw the baby out with the bath water.

We should have common goals on how we want the banking system to work.

• We want to strengthen regional, midsized and community banks, which are essential to the American economic system. They fill a critical role in small communities, offering local knowledge and local relationships that some large banks simply can’t provide – or can’t provide cost-effectively. Overall, we want to maintain the extraordinary strength this tiered system affords. JPMorgan Chase directly supports this goal as we are one of the largest bankers in America to regional and community banks. We bank approximately 350 of America’s 4,000+ banks across the country. This means we make loans to them or raise capital for them. In addition, we process payments for them, finance some of their mortgage activities, advise them on acquisitions, provide them with interest rate swaps and foreign exchange, and buy and sell securities for them. And we also finance their local communities (think hospitals, schools and larger companies) in ways they cannot.
• We need large, complex banks to continue to play a critical role in the U.S. and global financial system. And we need to recognize that they do so in a way regional banks can’t. Large banks are complex not because they want to be, but because they operate in complex global markets. Regional banks simply cannot manage the scale and complexity of transactions in 50 or 60 countries around the world to help some of America’s best and largest companies accomplish their goals. Think of equity, debt, M&A, research, swaps, foreign exchange, large payments systems, global custody and so on. It takes a global workforce with deep expertise and significant capabilities to provide these services. These large global banks finance not just the world’s largest companies but the world’s development institutions and even countries. Having some of the best large, complex banks in the world is essential to the success of America’s biggest companies, its economic system and its global competitiveness, which says nothing against the importance of having great midsized and community banks as well. And contrary to what some say – to be safe, a global bank needs both huge economies of scale and the strength of diversified earnings streams.
• We should want a system in which a bank failure does not cause undo panic and financial harm. While you don’t want banks to fail all the time, it should be allowed to happen and the resolution should follow a completely prescribed process. In almost all bank failures, uninsured deposits never resulted in lost money – but the very fear of loss can cause a run on any bank having characteristics similar to a bank that has failed. Resolution and recovery regulations did not work particularly well during the recent crisis – we should bring clarity and reassurance to both the unwinding process and measures to reduce the risk of additional bank runs. It should also be noted that banks pay for any bank failure (through fees paid to the Federal Deposit Insurance Corporation) as they pay for the whole financial regulatory system. And yes, while these costs are ultimately passed on to their customers – that is true for all industries – the cost is just the price of implementing proper regulations.
• We want proper transparency and strong regulations. However, it should be noted that regulations, the supervisory regime and the resolution regime currently in place did not stop SVB and Signature Bank from failing — and from causing systemwide issues. We should not aim for a regulatory regime that eliminates all failure but one that reduces the chance of failure and the odds of contagion. We should carefully study why this particular situation happened but not overreact.Strong regulations should not only minimize bank failures but also help to maintain the strength of banks as both the guardians of the financial system and engines that finance the great American economic machine.
• We should want market makers to have the ability to effectively intermediate, particularly in difficult markets, with central banks only stepping in during exceptional situations. In the last few years, we have had many situations in which disruptions in the market were, in my opinion, largely caused by certain regulations that did not improve the safety of the market maker but, instead, damaged the safety of the whole system. In addition, many of the new “shadow bank” market makers are fair-weather friends – they do not step in to help clients in tough times.
• We need banks to be there for their clients in tough times. And they have been. Banks can flex their capital and provide their clients with a lot of loans and liquidity when they really need it. For example, at the beginning of the COVID-19 crisis in March 2020, banks deployed over $500 billion in liquidity for clients and $500 billion in PPP loans – and this does not include banks’ share of the nearly $2 trillion in loans that entered forbearance. Banks also play a unique and fundamental role in the transmission of monetary policy because deposits in banks can be loaned out, effectively “creating” money. Some regulations and some accounting rules have become too procyclical and make it harder to do this.
• Regulation, particularly stress testing, should be more thoughtful and forward looking. It has become an enormous, mind-numbingly complex task about crossing t’s and dotting i’s. For example, the Fed’s stress test focuses on only one scenario, which is unlikely to happen. In fact, this may lull risk committee members at any institution into a false sense of security that the risks they are taking are properly vetted and can be easily handled. A less academic, more collaborative reflection of possible risks that a bank faces would better inform institutions and their regulators about the full landscape of potential risks.
• We should decide a priori what should stay in the regulatory system and what shouldn’t. There are reasons for certain choices, and they should not be the accidental outcome of uncoordinated decision making. Regulatory arbitrage is already forcing many activities, from certain types of lending to certain types of trading, outside the banking system. Among many questions that need definitive answers, a few big ones would be: Do you want the mortgage business, credit and market-making, along with other essential financial services, inside the banking system or outside of it? What would be the long-term effect of that choice? Under the new scheme, would nonbank credit-providing institutions be able to provide credit when their clients need them the most? I personally doubt that many of them could.
• We need banks to be attractive investments. It is in the interest of the financial system that banks not become “un-investable” because of uncertainty around regulations that affect capital, profitability and long-term investing. Erratic stress test capital requirements and constant uncertainty around future regulations damage the banking system without making it safer. While it is perfectly reasonable that a bank refrain from stock buybacks, dividends or growth under certain circumstances, it would be far better for the entire banking system if these rules were clearly enumerated (i.e., stipulate that a bank needs to reduce its buybacks and dividend if they breach certain thresholds).

If done properly, banking regulations could be calibrated — adding virtually no additional risk — to make it easier for banks to make loans, intermediate markets, finance the economy, manage a run on their bank and fail if need be. When it comes to political debate about banking regulations, there is little truth to the notion that regulations have been “loosened”, at least in the context of large banks. (To the contrary, our capital requirements have been increasing for years, as our fortress balance sheet chart shows in the introduction.) The debate should not always be about more or less regulation but about what mix of regulations will keep America’s banking system the best in the world, such as capital and leverage ratios, liquidity and what counts as liquidity, resolution rules, deposit insurance, securitization, stress testing, proper usage of the discount window, tailoring and other requirements (including potential requirements on shadow banks). Because of the recent problems, we can add to this mix the review of concentrated customers, uninsured deposits and potential limitations on the use of HTM portfolios. Ideally, new rules and regulations would also make it easier for banks to provide credit in tougher times.

ADJUSTING OUR STRATEGY TO THE NEW REGULATORY REALITY (BASEL III ENDGAME)

The Basel III Endgame (called Basel IV by some) — which, incredibly, has been nearly 10 years in the making — seems likely to increase, yet again, capital requirements for banks in general, through higher operational risk changes, and for trading and capital markets activity in particular, among other things. Whether or not we agree with all these changes (and we’ve discussed these regulations in detail in prior letters), we will simply have to adjust to them immediately. It’s important we describe to our shareholders how we will go about doing that and what it means for banks and, in particular, our bank.

First and foremost, banks must satisfy all of their regulators.

We must satisfy all of our regulators, and, remember, we have regulators all around the world, including more than 10 in the United States alone. Regulations include stress testing, reporting, compliance, legal obligations and trading surveillance, among others. While the business is the first line of defense on all these issues, we also have 3,700 people in compliance, 7,100 in risk and 1,400 lawyers actively working every day to meet the letter and the spirit of these rules along with the final line of defense — audit.

Rules are constantly changing and/or being enhanced and are sometimes, unfortunately, driven by political motivations. Relationships with regulators can often be intense, and, recently, we have lost some terrific people in our firm because of this. Regulators know that when banks disagree, we essentially have no choice — there is no one to appeal to, and even the act of appealing can make them angry. We simply ask respectfully to be heard, but at the end of the day, we will do what they ask us to do.

The full letter can be read here

Source: JP Morgan