Daniel Pinto sees a lot from his perch atop the world’s biggest investment bank.
He’s led J.P. Morgan Chase‘s corporate and investment bank since 2014, a time in which the bank has steadily gained market share from rivals in trading and banking.
Pinto has also served as J.P. Morgan’s co-President and co-chief operating officer for the last two years, making him a crucial deputy to CEO Jamie Dimon.
From his office on the 41st floor of the New York-based bank’s midtown headquarters, Pinto shared his views on the year ahead, the threat Big Tech poses to finance and the rise of sustainable finance.
CNBC: What is your outlook for 2020? How does the expected signing of the first phase of a U.S.-China trade deal impact things?
Pinto: I’m relatively positive. When you look around in the US or Europe, the consumer sector is doing quite well. We haven’t seen any deterioration in delinquencies or changing consumer patterns or anything like that.
The consumer sector is the bulk of the economy and still doing well. The corporate sector has been driven by different factors, particularly uncertainty related to the US-China situation. That led to less spending on capex and reduced inventories. At some point those will need to pick up.
I think any kind of deal between China and the U.S. will create momentum and then you’ll see the economy stabilizing. I don’t think 2020 will be a blow-out year in the U.S. but we’re talking about 1.5, 1.8% growth, which is fine.
Once some form of a trade deal happens, it will take care of the front page of the newspaper. The rest of the issues, the ones that are really difficult to solve like IP, political issues, they will still be there over time. These are natural tensions between the world’s two superpowers.
CNBC: During your tenure J.P. Morgan has managed to become the biggest Wall Street firm by revenue as European competitors like Deutsche Bank struggled. In investment banking, you reached an 8.7% market share for global advisory fees in 2018. How much bigger can you get? Can you continue to gain?
Pinto: Maybe, but it won’t be easy. For one thing, after changes in regulation, lending money became massively expensive with a very low return on equity. To compensate banks for providing credit, companies started sharing fees for investment banking business more broadly than they did before. That’s one of the reasons the number of banks participating in each deal has been going up in recent years, creating somewhat of a market share ceiling.
The second factor is conflicts. Managing global relationships properly and doing things the right way means we have to turn down business sometimes. These constraints ultimately make incremental market share tough – though we still see opportunities in places like Asia and through the international expansion of our commercial bank.
CNBC: Much has been written about the decline in trading revenues over the last decade as machines and indexing have taken over. What do you think the future holds? Will the shrinkage continue indefinitely?
Pinto: The trading business is very different than it was. There are different asset classes with different levels of liquidity— and in general, existing algorithms are constantly optimizing the market.
Therefore the arbitrage [opportunities] that existed 10 or 15 years ago don’t really exist anymore. Trading has become about doing humongous amounts of trades at a very tiny margin and being very effective in the way you process and manage the risk. That’s why, if you’re big and you have scale, that model is perfectly profitable. If you’re a middle of the pack player, it’s very difficult to exceed your cost of capital.
If you were to ask me about the world of fixed income and equities five years from now, after we’ve been in this down cycle, will we be higher or lower? I would bet that it’s going to be higher, because the world continues to finance. For instance, there will be more bonds to trade.
CNBC: This was the year it became clear that big tech – Google, Facebook, Uber – is coming for finance. What do you think of that threat?
Pinto: I think it’s only a matter of time before they participate in financial services in a bigger way. We have to assume that they will be real competitors.
The retail banking business has slightly bigger margins and less complexity so I see more head-to-head competition there. However, the reaction to Libra and the heightened sensitivity to digital currencies shows that it may take some time. That said, I wouldn’t act under the assumption that Libra is completely dead. In our case, we’re working on the development of JPM Coin which uses blockchain to make instantaneous payments across the world.
CNBC: In retail banking, digital banks like Chime in the U.S. and Monzo and Revolut overseas have managed to rapidly acquire customers, at least partly at the expense of big banks like J.P. Morgan and Wells Fargo. How do you see that playing out?
Pinto: They are acquiring clients, but the challenge is acquiring profitability.
Their valuations are going up because the number of clients is rising, but they will need to show that they can convert clients into primary accounts and profitable relationships.
The other issue to pay attention to is infrastructure and controls. As some digital banks gain in size and significance, I expect that they will be held to the same high standards of traditional retail banks.
They may or may not succeed, but we need to watch all these things. It’s a very dynamic space. The last thing you want is to feel invincible and then realize that you should have paid more attention.
CNBC: While J.P. Morgan has a massive budget for technology – it spends north of $11 billion annually on technology – executives said this year that tech costs would rise more slowly in the future. Will that hamper innovation?
Pinto: I believe we can get another 20% or 30% of extra output per dollar of investment into technology as we continue standardizing and modernizing our platforms.
Everything is changing so fast that if you miss the train of innovation, it’s going to be very difficult to catch up. The risk is to stop investing.
CNBC: You’re going to the World Economic Forum’s annual conference in Davos in a few weeks. What do you think will be the big topic there? [Note: This interview was conducted days before rival Goldman Sachs announced a $750 billion commitment to environmental, social and governance (ESG) projects.]
Pinto: I don’t go to a single client meeting where this [ESG] issue doesn’t come up in some form. The world is changing big time, and it’s real. It’s all about whether the final demand is there or not. What is happening now is the asset management companies are becoming more selective on what they do and what they don’t do. And the banks are also more selective in how we deal with certain sectors that are under scrutiny.
Either you are socially and environmentally responsible or you are not, I think that this is the world we are heading towards. It’s possible that some companies will really struggle to finance themselves, their cost of capital will go to the sky and they may not exist going forward.
It’s not just one bank or one sector, it’s all the sectors. It’s not a box-ticking exercise, this is real. This trend will continue to gain momentum and be exponentially higher over the next 10 years.
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