I’ve been studying Jamie Dimon’s letter to JPMorgan Chase shareholders during the last two days (it’s lengthy) and wished to test in right here to share this bit about what occurred with the banking system this spring. He’s uniquely positioned to share a perspective on it…
The latest failures of Silicon Valley Financial institution (SVB) in america and Credit score Suisse in Europe, and the associated stress within the banking system, underscore that merely satisfying regulatory necessities shouldn’t be enough. Dangers are plentiful, and managing these dangers requires fixed and vigilant scrutiny because the world evolves. Relating to the present disruption within the U.S. banking system, a lot of the dangers have been hiding in plain sight. Rate of interest publicity, the truthful worth of held-to-maturity (HTM) portfolios and the quantity of SVB’s uninsured deposits have been all the time identified – each to regulators and {the marketplace}. The unknown danger was that SVB’s over 35,000 company purchasers – and exercise inside them – have been managed by a small variety of enterprise capital firms and moved their deposits in lockstep. It’s unlikely that any latest change in regulatory necessities would have made a distinction in what adopted. As an alternative, the latest fast rise of rates of interest positioned heightened deal with the potential for fast deterioration of the truthful worth of HTM portfolios and, on this case, the shortage of stickiness of sure uninsured deposits. Mockingly, banks have been incented to personal very protected authorities securities as a result of they have been thought of extremely liquid by regulators and carried very low capital necessities. Even worse, the stress testing based mostly on the situation devised by the Federal Reserve Board (the Fed) by no means integrated rates of interest at greater ranges. This isn’t to absolve financial institution administration – it’s simply to clarify that this wasn’t the best hour for a lot of gamers. All of those colliding components grew to become critically necessary when {the marketplace}, ranking companies and depositors centered on them.
The daring is him, not me.
Within the monetary system, dangers nearly all the time do disguise in plain sight – as a result of they’re solely potential dangers throughout nearly all of the time. After they go from being potential dangers to precise dangers it may be sudden and the ramifications are usually not all the time apparent, even in case you’re centered on them otherwise you’re watching in real-time.
The distinctiveness of the issues at SVB have been written about advert nauseum. Monetary shares fell nearly 10% in March and the Banks trade group is down 19%. If Jaime is true this might symbolize a chance for buyers who need to place the guess that latest fears have been overblown. My pal Brian Belski at BMO put out a word this morning suggesting precisely that – he notes that 44% of economic sector shares within the S&P 500 are ranked as being prime quality which is above the historic common. Additional, monetary sector shares are anticipated to develop their dividends by 9% over the subsequent 12 months, the second highest of all sectors. Price contemplating.
Learn the remainder of the letter from Ser Jaime right here:
JPM Annual Report 2023
