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JP Morgan Chase : company profile

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JP Morgan Chase is one of the world's biggest financial services institutions, and the #1 US bank by revenues since 2011, when it first overtook troubled rival Bank of America. It combines the investment banking expertise of the legendary JP Morgan brand with the broad-based consumer services of the former Chase Manhattan bank. Between 2001 and 2004, the economic downturn forced the group to lean more heavily on its financial services businesses to counter the sharp ups and downs of investment banking. As a result, JP Morgan acquired retail banking giant Bank One in 2004 in a $60bn deal that put it close behind Citigroup, then the US leader. The unprecedented turmoil in global financial markets during 2008 provided JP Morgan with two further opportunities, the last-minute purchases of failing investment bank Bear Stearns and thrift bank Washington Mutual. The resulting business offers a broad base, deriving its income more or less equally between investment banking, retail banking and credit card services. During 2013 the bank was stung by a series of massive fines and settlements to resolve a host of different regulatory investigations.

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Competitors

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Brands & Activities

JP Morgan Chase is widely recognised as one of the titans of the global financial industry, and it has strengthened its presence in all sectors through a series of astute acquisitions, and by steering clear of most of the investments which humbled its biggest rivals during 2008 and 2009. However it remains largely focused on the US business, especially outside investment banking. This is arguably a weakness, but also an opportunity for future growth, probably via another large-scale acquisition, at which the group has become skilled. The bank was one of only a handful of major US financial institutions which managed to side-step the worst fallout from the subprime credit squeeze of 2007 and 2008. Instead it used the opportunity to bulk up with the purchase of both Bear Stearns and Washington Mutual (WaMu).

The group operates two distinct brands, straddling the twin markets of corporate and consumer banking respectively. JP Morgan specializes in investment, institutional and private banking, while Chase is the main consumer and SME commercial brand. The group's other various acquired brands have been gradually phased out. The WaMu name had been almost entirely dispensed with by early 2010, joining Bank One and others in the brand dustbin.

JP Morgan's principal role is in international investment banking, offering advice, strategy and capital to corporations, governments and institutional investors through offices in more than 50 countries. As such it now ranks among the top two globally. For 2015 it was once again #1 in global investment banking fees, which came in just under $6bn, according to market-watcher Dealogic. (Goldman Sachs was #2 at $5.5bn). The group provides private equity, treasury, research and securities services, targeting large corporations, governments, wealthy individuals and institutional investors.

It has strengthened its position over the years with a series of selective acquisitions. In 2004 the group announced the merger of its UK investment banking business with that of famed British finance house Cazenove to form the joint venture JP Morgan Cazenove, of which it took full control at the end of 2009. Another celebrated UK-based institution, asset manager Robert Fleming, was acquired in 2000, becoming JP Morgan Fleming for several years. The Fleming name was later dropped and the business consolidated as JP Morgan Asset Management. In 2004 the group acquired a majority holding in leading US hedge fund Highbridge Capital, and took full control of that business too in 2009. Low-cost US direct brokerage subsidiary Brown & Co was sold in 2005 to E*Trade for $1.6bn, and a private equity business, JP Morgan Partners, was split in two and sold to managers. It now trades as two separate independent companies, CCMP Capital Advisors and Panorama Capital, which continue to manage the group's existing investments under contract.

JP Morgan was less badly affected than many of its rivals by the brutal shake-out in 2008 caused by exposure to mortgage-backed bonds. It stepped in to rescue smaller Wall Street investment bank Bear Stearns, which had established a position as a specialist in mortgage-backed derivatives. In March 2008, that firm came close to collapse as a result of panic withdrawals of funds by its institutional clients, and its stock value plunged. JPM initially structured a deal at just $2 per share (or a total $236m), just a fraction of the $64 at which the stock had been valued just one week earlier. As a result of furious protests from Bear Stearns shareholders, JPM raised its offer to $10 per share. The capture of Bear Stearns gave JP Morgan its first real position in prime brokerage, which provides financing for hedge funds, and also strengthened its position in mortgage securities. Bear Stearns' various units were merged with their counterparts at JP Morgan, becoming what is now JP Morgan Securities. The combination of adjustments to Bear Stearns' portfolio as well as writedowns in its own business led to a pretty bleak performance for the year, though less catastrophic than that of most competitors.

Apart from that 2008 loss, the investment banking division has until recently remained the group's most consistently profitable. However, this division blotted its hitherto-spotless record in 2012 when it was forced to reveal that it had badly misjudged bets on credit derivatives. This so-called "London whale" trading error generated substantial losses during the year, as well as several large fines from regulators in 2013.

Corporate & investment banking was flat in 2017, with net income down marginally to $10.81bn, on revenues down 2% to $34.49bn.

A separate commercial banking division handles medium-sized corporate customers (defined as those with annual revenues between $10m and $2bn), and there are also sizeable asset management and private equity divisions. The asset management delivered revenues of $12.92bn in 2017, with net income of $2.34bn. Commercial banking earned $3.54bn on revenues of $8.61bn.

JP Morgan is partnered by the retail and consumer banking business of Chase, originally acquired in 2000. Like other banks in its market, JP Morgan Chase also suffered from the savagery of the last economic downturn in 2001. Among other issues, it was left at that time with a $1bn exposure to failed energy broker Enron (although it was later able to recover $600m of this from insurers), as well as potential liabilities from other troubled companies, such as Kmart. With revenues and profits under pressure in this area, the group came to lean more heavily over the next few years on the consumer services offered under the Chase brand, already a leader in credit cards, home and auto finance.

This encouraged the group to build further upon its retail banking business and the deal to acquire rival Bank One was announced in January 2004. Previously Bank One had been America's 6th largest bank by assets. Although it had a sizeable investment and corporate banking business of its own (subsequently merged into JP Morgan), its main area of strength was in the consumer and small business market. Bank One's consumer and small business operations were absorbed into an enlarged retail financial services division, and all Bank One's retail outlets transferred to the Chase brand during 2006. This division was expanded further at the end of 2006 with the purchase of Bank of New York's consumer and business banking operations. By the end of 2007, the group was the second-biggest bank by domestic deposits in the US, well ahead of Citigroup, and trailing only Bank of America.

As with its rescue of Bear Stearns earlier the same year, JP Morgan stepped in once again in September 2008 to provide a lifeline to the customers of failed savings and loan bank Washington Mutual (WaMu). US regulators seized control of the bank after its share price was effectively wiped out by a crisis of confidence that resulted in depositors withdrawing almost $17bn of savings from the bank in less than two weeks. JP Morgan agreed to acquire all WaMu's remaining deposits, assets and some of its liabilities, including its mortgage portfolio, for around $1.9bn. By December 2013, the group managed 29.4m checking accounts. The addition of WaMu's retail chain to the existing Chase network created the country's second-largest branch network with around 5,630 offices in 23 states by the end of 2013. That deal also extended the Chase footprint into new states such as Georgia, Idaho, Nevada and Oregon. The rebranding of WaMu began in March 2009 when 708 branches in the state of California transferred to the Chase brand. All remaining branches were converted by the end of the year. The total branch footprint has reduced a little since then, falling to 5,413 branches by the end of 2015.

However, the addition of WaMu also substantially increased the group's exposure to bad loans from credit card, consumer finance and mortgage lending. JP Morgan Chase is America's - and also the world's - single biggest issuer of credit cards. It manages a huge portfolio of affiliate relationships, producing co-branded credit and debit cards for AARP, Amazon, Marriott, Sony, Disney and Continental, Southwest and United airlines. In 2004, the group acquired the private label credit card portfolio of Circuit City, followed by Sears Canada in 2005, and Kohl's in 2006. In 2008, it agreed to pay $3.6bn for just under half of Target's store and credit card portfolio, although the retailer retained management control of that business. However the losses incurred during the 2008/2009 recession prompted the bank to begin withdrawing cards from some customers with the aim of reducing its customerbase. The Target loan portfolio was sold back in 2012, and the number of open credit card accounts has dropped from almost 91m at the end of 2010 to 59.3m by December 2015 of which only a little over half still had regular sales activity. Total sales volumes in 2015 were $496bn.

The group is also a major force in mortgages, following the acquisition of the mortgage portfolios of Advanta Corp and WaMu. It now ranks as the US #2 in mortgage lending behind Wells Fargo but ahead of Bank Of America. Total lending was in excess of $220bn at the end of 2015. It is also the largest US bank originator of auto leases and loans, with a network of some 14,500 auto dealerships. In 2006 it moved into the education loan segment with the acquisition of Collegiate Funding Services, which manages around $6bn of outstanding debts. The group also retains a 45% shareholding in investment fund company American Century, and has a strategic alliance with Fidelity to offer fixed income and savings products to the latter's clients.

Write-offs and substantial provisions for further loan losses caused the contribution from both retail financial services and card services to plunge for 2008 and 2009. However, reductions in provisions prompted a sharp rebound between 2010 and 2012.

Now described as consumer & community banking, the Chase business is the group's biggest division by revenues, but was overtaken again in profitability in 2017 by investment banking. Net income slipped by 3% to $9.40bn as a result of higher bad debt provisions, despite a 3% lift in revenues to $46.49bn. There are three main revenues streams. General consumer & business banking generated revenues of $21.10bn in fees and interest. Home lending fall back sharply to $5.96bn, well below past highs. Cards, merchant services & auto loans contributed $19.43bn.

Financials

Despite the bolt-on of two additional substantial businesses, JP Morgan Chase's combined revenues for 2008 fell 6% to $67.3bn, reflecting extensive write-offs. The total provision for further credit losses soared to almost $21bn, and net income fell by 64% to $5.6bn. The addition of Bear Stearns and WaMu, as well as the substantial rebound across the industry during 2009 all but erased memories of 2008's troubles. Reported revenues leapt 49% to a record $100.4bn, and net income more than doubled to $11.7bn. Another strong year in 2010 resulted in a modest increase in total reported revenues to $102.7bn, but a 48% leap in net income to $17.4bn. That was mainly the result of a substantial cut in provisions against credit losses. There was a fall in revenues for 2011, down 5% to $97.2bn; however, another cut in loss provisions allowed net income to rise by 9% to a new record of $18.98bn. There was another strong year in 2012, with net revenues more or less unchanged at $97.03bn, while net income hit a new high of $21.28bn.

The string of multi-billion-dollar fines and settlements incurred during the course of 2013 made only a small dent in final performance. Most settlements had already been provided for. Full year net income slipped only 16% (or $3.4bn) to $17.9bn, while reported revenues were down slightly to $96.61bn. There was another revenue decline in 2014 to $97.92bn (managed basis), but net income jumped by almost 22% to a new company record of $21.76bn. In fact that wasn't so much the result of stronger performance in the group's main operating businesses but the absence of the previous year's $6.8bn loss from private equity trading. Total assets at the end of 2014 were $2,573bn. For 2015, JPMC's net income reached a new high of $24.44bn, up an impressive 12%. Revenues drifted slightly lower again on a managed basis to $96.63bn, while total assets slipped 9% to $2,352bn.

A big uplift in market sentiment in the final quarter, following President Trump's election, resulted in record net income for 2016, at $24.73bn, up 1%. Revenues rose 3% on a managed basis to $99.14bn, while total assets were up 6% to $2,491bn.

Revenues for 2017 rose 5% on a managed basis to $103.64bn (or $99.62bn reported). Net income took a dent from a one-off charge related to President Trump's Tax Cuts & Jobs Act, slipping 1% to $24.44bn. However, the bank expects significant benefits from bill to flow through for 2018 and beyond. Total assets were $2,534bn.

Background

JP Morgan Chase was created in 2000 from the acquisition of legendary investment bank JP Morgan by commercial banking giant Chase Manhattan. Between them those two companies and their predecessors had already played an integral part in the creation of the modern US economy, and especially in the elevation of New York into the nation's most prominent city and the world's foremost financial centre.

The Manhattan Company was founded in the last year of the 18th century in a New York plagued by yellow fever. It was generally believed that the disease was being spread through the fast-expanding city's untreated water supply, and the creation of a new hygienic supply was entrusted to a private company in order to get around the fierce competition which existed between rival municipal bodies. The company's founders also made allowance that any surplus financial capital should be used to establish a bank, later The Bank of the Manhattan Company. The water company dwindled, and this side of the business was eventually sold to the city in 1808. Meanwhile the bank prospered, playing a significant role in the development not only of New York City but the nation as a whole, financing among other projects the building of the Erie Canal, which connected the Hudson River and the Atlantic Ocean to the Great Lakes in 1859. As the economy grew, numerous other banks sprang up to serve the city's needs, including Hanover Bank, Manufacturers' Bank of Brooklyn and in 1877, the Chase National Bank, founded by septuagenarian currency dealer John Thompson and named in honour of Salmon P Chase, former Secretary of the Treasury and original architect of the US national bank system. However the most important of these start-up banks was to be the Chemical Bank of New York, spun out of a local chemical manufacturing firm in 1851.

As commercial banks expanded during the course of the 19th century, so too did the number of merchant banking companies which took advantage of America's new wealth to invest in European projects. In 1854, an American named Junius Morgan became the senior partner in a merchant banking firm in London, firmly established as the world's most important financial centre. The firm was subsequently renamed JS Morgan & Co. In 1860 Morgan Sr established his son, John Pierpoint Morgan, as his agent in New York, serving as a sales and distribution arm for the European securities being underwritten in London. Pierpoint Morgan later struck several partnerships of his own. The most significant of these was with Philadelphia banker Anthony Drexel to establish Drexel, Morgan & Co in New York in 1871. This firm changed its name to JP Morgan & Co in 1893 following Drexel's death.

A Paris office was also established in 1871, initially to supervise a hugely risky £10m pound loan to the besieged government of France during the Franco-Prussian War. Following his father's death in 1890, J Pierpoint Morgan consolidated the separate investment banks in New York, London and Paris under his control, and went on to forge an unrivalled reputation for himself as "the mightiest personal force in American business life". Offering both commercial and investment banking services, JP Morgan was instrumental in financing many of the enterprises that established the United States as a modern industrial power, including US Steel, General Electric, AT&T and several other prominent corporations. Following his death in 1913, his son JP ("Jack") Morgan invested heavily in the beleaguered British economy during the First World War, and later reaped the initial rewards of the huge global prosperity which followed in the 1920s.

However that prosperity was all but erased by the Great Crash of 1929, in which more than 5,000 banks and investment companies went out of business in the US alone, and millions lost their jobs. In order to avoid a repeat of this catastrophe, the government passed the Glass Steagall Banking Act of 1933 which prevented companies from being involved in both commercial and investment banking at the same time. As a result, JP Morgan & Co took the decision to concentrate on commercial banking and shut down its investment banking activities. (Henry Morgan, one of Jack's sons, and a handful of other JP Morgan partners and employees left to form the investment bank Morgan Stanley in 1935).

By now the commercial banking environment was dominated by Chase National Bank. During the Roaring 1920s, both Chase and The Bank of Manhattan has expanded dramatically, acquiring a string of smaller rivals. By 1928, Chase had become the country's biggest bank with assets of more than $1bn. In 1930 it acquired Equitable Trust from the Rockefeller family, making it the world's biggest bank as well. Manhattan was not far behind, having swallowed up more than 20 of its competitors since 1918. Weathering the storm of Depression, followed by World War II and then a new age of prosperity during the 1950s, Chase, Manhattan and JP Morgan all continued to thrive. Chase established itself as one of the country's foremost corporate lenders, while Manhattan became one of New York's biggest retail banks. In 1955 the two merged to form Chase Manhattan Bank. In the 1960s and 1970s, Chase Manhattan expanded its operations internationally, establishing offices around the world, and within the US through the launch of a hugely successful credit card. However the company suffered badly from the oil crisis of the 1970s and the real estate crash of the 1980s. This led to a certain amount of retrenchment, including the eventual closure of all its international outposts.

During the 1980s, the complexion of the world banking industry began to change once again. JP Morgan had also expanded dramatically, reversing into much larger commercial lender Guaranty Trust Company to form Morgan Guaranty. But lending was beginning to be become less profitable. At the same time it was becoming increasingly apparent that the limitations imposed on financial institutions in the US by the Glass-Steagall Act of 1933 were less relevant. JP Morgan had maintained its investment banking activities in Europe, and canvassed US regulators to remove restrictions in its home market. As a result in 1989 the Federal Reserve removed some of these restrictions, and JP Morgan became the first US commercial bank allowed to underwrite corporate debt. A year later, the group was granted permission to underwrite and deal in corporate equities as well, allowing it to take advantage of the renewed economic boom of the decade that followed.

Meanwhile, the old Chemical Bank of New York had also kept pace with consolidation within the industry, acquiring several rivals including Texas Commerce Bank in 1987 and Manufacturers Hanover ("Manny Hanny") in 1991. However the most ambitious deal launched by Chemical's CEO Walter Shipley was a $9.8bn takeover of Chase Manhattan in 1996. The latter was struggling with downturns in profitability, and the merger with Chemical - which adopted the Chase Manhattan name - created the largest bank holding company in the United States. Yet another mammoth merger was initiated four years later when Chase agreed to acquire JP Morgan for $33bn to form the current group. The same year, asset management company Robert Fleming, operating in the UK and Asia-Pacific, was acquired by Chase for around $2.6bn.

In 2003, in the general fallout from the various financial scandals that rocked corporate America a year earlier, JP Morgan agreed to pay a $135m fine from the SEC related to its involvement with failed energy giant Enron, as well as $25m to settle allegations that it broke rules governing the allocation of shares in IPOs in 1999 and 2000. A subsequent civil lawsuit cost the group another $425m in 2006. Virtually all the major US banks were charged with artificially boosting IPO share sales by inducing clients to buy stock on favourable terms. In July 2004, JP Morgan agreed to pay a further $50m to settle charges that it had allowed improper trading of mutual funds. Shortly afterwards the group said it would increase its provision for any future lawsuits related to Enron, Worldcom or other corporate failures by $3.7bn to $4.7bn. In March 2005, a few days after Worldcom's Bernie Ebbers was found guilty of committing that $11bn fraud, JP Morgan agreed to pay $2bn to settle investors' claims that it had not adequately investigated the company's finances before recommending its shares. In June it settled a class action lawsuit from Enron investors led by the University of California with a payment of around $2.2bn.

Despite these legal challenges, the group continued to expand its scope. The most significant development was the announcement in January 2004 of plans to acquire smaller rival Bank One for around $58bn in stock. The deal was completed mid-year. JP Morgan Chase head William Harrison stepped down as CEO of the merged group at the end of 2005, and was replaced by Bank One's James Dimon. Harrison remained chairman until the end of 2006, when that role too was inherited by Dimon. He has overseen further expansion of the business, not least through two canny acquisitions struck amid the turmoil of 2008's global financial crisis.

First established in 1923, Bear Stearns was one of the last "old school" investment banks, an aggressive predator which appeared to thrive on high-risk, even higher-reward gambles. Despite the more sober atmosphere which began to prevail in the investment banking industry after the economic downturn of 2001, Bear Stearns continued to pursue a rapacious approach more reminiscent of the glory days of Wall Street's 1980s boom. It was widely admired for many years for this brazen stance, but the dramatic fallout from the collapse in US house prices began to create a serious problem for Bear Stearns in late 2007 because of its extensive exposure to subprime assets. It was rescued from looming bankruptcy by a cut-price takeover offer from JP Morgan Chase.

Six months later, in September, JP Morgan Chase struck a deal with US regulators to absorb the banking business of failed savings and loan Washington Mutual. At the time of its collapse, WaMu was the sixth largest bank in the US. The business was first established in 1889 to assist with the rebuilding of the city of Seattle, whose business district had been destroyed by a huge fire. Although it grew in steadily in size during the 290th century, it was not until the 1980s that the business joined the senior ranks of the US industry. WaMu relinquished it s mutual status in 1983 and issued an IPO, using these funds to launch a massive acquisition drive. During the 1990s and 2000s, the company expanded dramatically through the purchase of numerous other savings or mortgage banks. One of its biggest purchases was the subprime credit card lender Providian, acquired in 2005 for $6.5bn. However its exposure to subprime mortgages and loans began to create substantial problems during the summer of 2008, and the bank was forced to report huge losses. A markdown in its credit rating in September prompted customers to begin withdrawing their savings from the bank. In the space of ten days, almost $17bn of deposits were pulled out, making the bank technically insolvent and forcing regulators to suspend operations.

Last full revision 18th August 2016

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