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 They started retooling the bank's assets and operations to get ready
for the day when rates started rising, people close to the bank said
on Tuesday. Executives looked at the bank from top to bottom, and
took steps ranging from adjusting its investment portfolio to
finding ways to hang on to deposits when higher rates give customers
an incentive to move money elsewhere.
Regulators encouraged them, but it was a massive undertaking
entailing huge — and sometimes costly — shifts around the bank.
Then JPMorgan waited. And waited, and waited.
"It costs us a significant amount of current income to be positioned
this way," JPMorgan Chief Executive Jamie Dimon wrote in a letter to
shareholders in April. "But we believe it is better to be safe than
to be sorry."
On Tuesday, in a little-noticed slide in a presentation to
investors, JPMorgan said its efforts to position its investment
portfolio for higher rates could begin to pay off as soon as the
middle of this year, potentially adding hundreds of millions to its
interest income in 2014.
The timing could not be better for JPMorgan. As the largest U.S.
bank's legal problems start to recede after a year with $20 billion
of settlements, investors are increasingly turning their focus to
the performance of its main banking business, looking for how it
would do in a rising rate environment and tepid U.S. economic
recovery.
Yields on longer-term bonds started rising last year, as the U.S.
Federal Reserve signaled it was starting to cut back on its massive
monetary stimulus program, called quantitative easing. But economic
growth has not been strong enough to translate into stronger loan
demand and higher revenue for banks. JPMorgan saw fourth-quarter
profits fall 7.3 percent, in part due to its legal woes and weak
demand for investment banking services.
JPMorgan is hardly the only bank to be getting ready for rising
rates.
In 2010, the Federal Deposit Insurance Corp and other regulators
warned banks to prepare for the risk of rising interest rates, which
can immediately hurt the value of bonds that suddenly pay
below-market yields. Higher rates can also increase banks' funding
costs, a key expense for lenders and traders.
Jason Goldberg, an analyst at Barclays, said all 25 banks he covers
have said that they would benefit from rising rates, up from an
average of 66 percent of those banks over the last 38 quarters.
On a conference call on Tuesday, Wells Fargo & Co's <WFC.N> Chief
Financial Officer Tim Sloan said the bank was ready for rising
rates, adding that the most likely scenario is longer-term bond
yields rising in the near future, and shorter-term rates rising in
the next year or two.
PREPPING THE PORTFOLIO
In 2010, JPMorgan started focusing its investment portfolio, where
the bank invests funds that it could not otherwise economically lend
out, on shorter-term securities instead of longer-term bonds.
Shorter-term notes offer less income, but they also mature sooner,
allowing the bank to re-invest money at higher rates once bond
yields start rising.
Yields did not start to rise until the summer of 2013, costing the
bank hundreds of millions of dollars of income that it could have
earned from higher-yielding securities.
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With recent increases in longer-term yields, JPMorgan said by the
middle of this year it will have invested enough at the new higher
yields to be making money from interest.
When shorter-term rates also rise, the benefits to JPMorgan could
ultimately prove to be substantial. In the third quarter, JPMorgan
said that a 2 percentage point increase in short- and long-term
rates would ultimately lift its pretax income by $4.09 billion a
year. (The bank posted $25.9 billion in pre-tax profit in 2013.)
Much of those gains would come from rising short-term rates, a
change that is not expected until 2015. With rising short-term
rates, banks can take deposits and invest them for a month or so
with little risk, and earn more income.
JPMorgan has estimated that higher short-term rates would deliver
about two-thirds of the additional interest income it would expect
from a 3 percentage point rise in both short and long rates.
MAKING DEPOSITS STICK
People close to the bank say JPMorgan has also been preparing for a
rise in rates across its myriad businesses, and not just its
investment portfolio.
In its retail banking unit, for example, deposits in the
fourth-quarter were 10 percent higher than a year earlier, and
amounted to about a fifth of total liabilities.
The sources said JPMorgan views deposits with caution, and
recognizes that once rates rise even loyal customers will be quicker
to shift any extra cash from checking accounts to higher yielding
instruments such as money-market accounts.
The bank is hoping it can stem some of the expected deposit erosion
by having superior customer service, so that some customers never
consider taking money out of their accounts, or consider keeping
more at JPMorgan than they would otherwise, the sources said.
It is focusing on customers who value the convenience of its mobile
account access and branches that will likely help the bank retain
balances, says Stephen Beck, founder and managing director of
consulting firm cg42, which tracks customer loyalty.
Beck said he found that JPMorgan's customers were significantly less
likely last year to become frustrated and close their Chase accounts
than they were two years earlier.
(Reporting by David Henry in New York; editing by Dan Wilchins and Kenneth Maxwell)
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