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Friday, October 11, 2013

Dimon Faces the Analysts

Reported by Tommy Fernandez

He's faced regulators and enforcement honchos, politicians and the TV press, today JP Morgan [profile] CEO Jamie Dimon faced the analysts.

Just a week after MFWire reported rumors that Dimon might looking to sell off JP Morgan's fund business, Dimon held a conference call about his company's third quarter earnings.

He had a lot of explaining to do, given his company's nearly $400 million loss, due in part to the $9.2 billion in legal costs, penalties and fees levied upon his company.

During the conference call, of which SeekingAlpha has provided a transcript, Dimon and chief financial officer Marianne Lake had a number of interesting things to say about the company.

Simplifying the Business
For instance, Dimon had plenty to say on the subject of "simplifying" JP Morgan's business.

First, simplifying our business. If you look at what we’re doing, we’re spinning off One Equity Partners, selling physical commodities, and we’ve closed down a bunch of business lines. I think it’s a core business principle to always simplify your business and to focus on where you could really win. It’s a little more amplified this time because obviously there’s a new regulatory environment, capital, and we need to focus a lot of our management mindset on controls.

You also, on that first column, you’ll see we’re de-risking. We’re trying to meet new standards that we’ve set for ourselves and the regulators want us to set to reduce risk to our company, particularly on anti-money laundering. It will have a revenue effect, so my guess is, if you asked, probably a couple of hundred million dollars across all of our businesses.

Dimon does seem to be open to deals. For example, the Wall Street Journal recently reported that JP Morgan put its $3.3 billion commodities business on the auction block.

Dimon explained that the company, going forward, will implement massive efforts to improve compliance.

The middle column shows you the investments we’re making in control. We want to be best in class. We want to get to Six Sigma. It’s become the number one priority. Just to give you an idea, we’re going to spend about $1 billion more. But that’s not the effort.

The real effort, if you think about it, is how much resources have been redirected to get this right. And there’s unprecedented work streams, like 500 people working on CCAR, 500 people working on resolution and recovery. We just turned in a, believe it or not, 100,000-page plan. We’ve added 5,000 people. And so this is a permanent investment. These costs are not going to go away. I think it’s important we get this exactly right.

If you look at the right hand column, I just want to go down that one by one. As I just mentioned, it is permanent cost structure that will stay in place, but our overhead is very competitive. We’re very rigorous on expenses. And we intend to stay that way.

A notable recent move to cut down on legal risk is the company's decision to pull back from lending to politically unpopular customers like pawn shops, payday lenders, and check cashers, among others, according to the Wall Street Journal.

Legal Uncertainty
Lake had a lot to say on the subject of JP Morgan's litigation costs.

Having said that, on page two, I’ll start by saying that we appreciate that the litigation expense of $9.2 billion is much more significant than you’ve been expecting. It’s much more significant that we expected until very recently.

The reality is that over the last few weeks, the environment’s become highly charged and very volatile. Things have been very fluid, and the situation escalated to the point where we’re facing very large premiums and penalties, the level of which has gone far beyond what we reasonably expected. However, those are the facts we’re dealing with today in our reserving actions this quarter and are trying as hard as possible to put these issues behind us.

The balance at quarter end reflects the $9.2 billion we’re expensing this quarter. This expense also covers a range of matters, including but not limited to mortgage-backed securities. And the impact from their income you can see is high as it’s being effected by a portion of the expense estimated to relate to enforcement penalties, which would not be tax deductible.

Again, these estimates relate to a number of cases including, among other things, mortgage, as well as the recently announced CIO settlements. We do expect litigation expenses to normalize over time to much lower levels, but they may be somewhat lumpy quarter over quarter.

Dimon had this to say after a few analysts asked whether he could nail down the company's expected litigation costs going forward.

We would love to reduce the uncertainty around this for ourselves and for you, but it’s very, very hard to do. So the way I look at it is it will probably be elevated the next year or two, not like we just went through, but it will necessarily be lumpy. So as we settle, as we negotiate, as we figure out - remember there are multiple agencies involved in every case now. So you saw in the CIO thing, that we paid four and maybe eventually five penalties, which we really did not expect. And so we just have to deal with it and deal with the reality as it is. It will abate over time, and the underlying power of the company you can see. I wish I could give you a better answer, but one day it won’t be a big number.

In all fairness, it's likely impossible for Dimon and his colleagues to nail down future legal costs, given the growing number of regulatory headaches. For example, reports that the Commodity Futures Trading Commission is trying to reopen the London whale case.

Asset Management Arm is Doing Nicely
Both executives had glowing things to say about their asset management arm, like this comment from Lake.

Page 12, and asset management, another very strong quarter for asset management, with net income of $476 million, up 7% year on year and an ROE of 21%. Revenue was $2.8 billion, up 12% over last year, and while overall high market levels did help, very strong fund performance and flows drove the story. 74% of our mutual fund AUM is ranked in the first or second quartiles of performance over five years. And we saw $19 billion of long term net inflows. This is the 18th consecutive quarter of long term net inflows.

Importantly, we saw this in every single long term asset class, in every region, and it brought our year to date long term flows to $74 billion, which compares to just less than $60 billion for the full year of 2012.

We ended the quarter with AUM of $1.5 trillion, up 12% year on year, and in banking, we continue to see deposit and loan growth across the board.

That's good news, if Dimon is indeed looking to sell off JP Morgan's fund business. Last weekend, the Financial Times ran an OpEd arguing that JP Morgan needed to be broken up and that the company is closing at least 100 mutual funds.


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