My key learning from J P Morgan Chairman’s letter from 2005-16

I know many of you would have already read Jamie Dimon letters to JP Morgan shareholders, if anyone has not .. Please do read all letters in full from 2005-10 and selectively from 2011-16… Few important takeaways for me are [my understanding might be wrong at few places, please correct if come across any mistake]

1) Diversified risk by way of diversified loan book. Within this diversified stream there should be segments with durable profits which can absorb losses of cyclical segments.   Mix of businesses lead to effective cross sell….

2) Deeper penetration of customer using technology and cross selling

 3) Strong balance sheet by way of adequate tier 1 capital and access to retail deposits

4) Innovation by introducing new products and meeting customer needs

5) Most banks failed due to lack of diversification – customer and geography wise and using ST liquid assets [mostly overnight or for 45 days CD] for long-term illiquid assets. To never fail banks require 1) BS strength 2) Sufficient Liquidity [essentially no ALM mismatch] 3) Diverse earnings [reduces risk]

6) Scale very important to be low-cost provider. Only low cost provider will survive for long [both interest cost and other expenses]

7) Cross selling not bad, if done properly. In fact most imp competitive advantage

8) Innovation should be part of DNA..

9) Best way to compensate top management is by way of stocks. They should be made to retain majority of the stock option till they continue to work.

10) Home mortgages through brokers produced 2-3x more losses than direct sourcing. Eventually completely stopped sourcing through brokers.

11) In one of the letters he recommended providing provision for credit losses based on loss over complete cycle and says this will be counter-cyclical measure [I think new IND AS rules on credit cost is same as what James is talking about]

12) It was interesting to note that during 2007-09 crisis retail banking posted more losses than corporates, in India it was opposite.  Which shows it more important to keep analyzing whose BS is more stretched. Corporate or retail.

13) Regulated entities compromise with their system to compete with unregulated entities…where regulatory arbitrage is big. [May be gold loans during 2008-11 in India, future could be real estate loans to developers – ]

14) Crisis generally emanate from 1) Trade imbalances 2) Foreign exchange issues and 3) Real estate speculation

15) In US payback of branch is 7 years [2013 letter] 

16) Both physical and digital network is required… [2012 letter]. Customers get confidence when interact face to face. For small and middle business customers physical branch must….  

17) Moats of Bank: 1) Strong BS 2) Economies of scale 3) Technology 4) Ability to cross sell…..

18) Geopolitical risks: Starting from Korean War to till date, only Middle East crisis of 1974 which resulted in spike in oil prices caused problem to banking sector.