Pinto (JPMorgan): «ECB stabilizes the economy, this helps Italy. Banks are solid»
President and Chief Operating Officer of the bank: «We are not heading for a crash, we are not in a financial crisis: markets are orderly»
di Isabella Bufacchi
9' di lettura
Interview with Daniel Pinto, President and Chief Operating Officer of JP Morgan Chase and CEO of the corporate and investment bank of JP Morgan. He was interviewed in the Milan office of JP Morgan. Francesco Cardinali is senior country officer for Italy since 2018 and in JP Morgan since 1996.
Pinto began his career as a financial analyst and foreign exchange trader at Manufacturers Hanover in 1983 in Buenos Aires. He was born in Argentina. He moved to London in 1996 to oversee local markets in Eastern Europe, the Middle East, Africa and Asia for Chase Manhattan, later taking charge of the markets side of the firm's emerging-market business.
JP Morgan has been in Italy for the past 106 years. You know Italy well. Yet Italy is going through exceptional times and multiple challenges, from the war in Ukraine to the pandemic, from the energy supply shock to very high inflation pressures. Is Italy resilient for all this?
«Italy has faced many challenges in the past and it will face new many challenges in the future. You have always tackled challenges in a very thoughtful way. You have a very capable government and this gives confidence that a disciplined solution will arrive. We have been here in Italy for more than a century, in good and tough times. We have been growing in Italy by 10-15% in the past two years».
The spread of yields between Italian and German government bonds has been widening, it hit a high of around 250 basis points. The ECB is creating a new tool to stop spread widening in excess of fundamentals, that is, “fragmentation”: is it needed?
The support from the ECB and what the ECB is looking to do is stabilize the economy which would be helpful for Italy. The banking system in Italy is well capitalized, so the banks will benefit from higher rates, even as provisions go up. Obviously when the economy slows down, for us in the US and for Italian banks in Italy, the level of defaults tend to go up. But I think this is a normal cycle. The financial industry here is stronger than it was in the past.
Compared to past crises, how severe is this crisis?
Let me be clear on one thing. I do not think this is a crisis, in the economic sense. This situation has nothing to do with the crisis in 2008 and in 2020. The economy may slow down, we do not know how much, inflation will have to come down, but this is an economic cycle. I do not think we are going to have an economic crisis in Europe, in the US or anywhere else. We might have a recession, but a recession is normal. And I do not think we are heading for a crash here. I truly believe this. Consumers and companies are in a very good shape. They have cash, there is less leverage. Companies are well funded, banks have a lot of capital. So overall I do not think we are in a financial crisis situation: the dynamics in Italy, Europe and the US are not massively different. And if we will end up in a recession, this will help to bring inflation down to the target, to an acceptable level of inflation expectations: if not, it will become tougher and tougher to bring inflation down.
What about a debt crisis?
Interest rates are for sure going to go up. We do not know how far they are going to go up. This is why I think it is important, in the next six months, to see how inflation and how the economy will react to central bank actions. Italy has a high debt/Gdp ratio but it also has very high savings that help to finance the government.
Europe is facing multiple challenges and it is fragmented. Is Europe losing appeal for JP Morgan businesses, is Europe too much of a patchwork?
I come to Europe from the US once a month. This week I was in Milan and Frankfurt, last month I was in Paris and Madrid. Our European business is very important and countries such as Italy, Germany, France, Spain are part of our success. Europe is very important for us, and we continue growing in Europe. We recently bought a company is Ireland called Global Shares, for shares registry: it employs 800 people. We have about 5.000 people in Continental Europe and growing. Roughly half of our wholesale business is outside the U.S., and out of that Europe accounts for two thirds. As time goes by, I see further integration in Europe. The EU is a very valid project, developed over a long period of time and it continues to improve. Having 27 countries agreeing on every matter is always going to be a challenge but as Europe goes through difficult times, such as Brexit or a financial crisis or the war now in Ukraine, the region has become more united. JP Morgan is not reducing its presence here. In fact, the opposite is true, we think the opportunities here are great, we want to grow and invest in this region. JP Morgan is a strong name in Europe and well respected and we are here to stay.
How are you reorganizing your European businesses after Brexit. The ECB would like to avoid “empty shells” moving from the UK into Europe…
We didn't move any empty shells for sure. The ECB has been very receptive to our model here. We merged all our European banks into one unit, and we increased our headcount here in Europe by 2,000-3,000 people. Whatever is traded in Europe, be it equities, bonds, derivatives, it is all being done here in the EU.
Your model could be applied also to European banks to create European banking champions… Going for scale.Yes, I think our model could prove helpful to others. We have moved the associated capital and liquidity for our EU activity from London to the EU. Our Frankfurt-based entity, which was created by merging the Lux bank, the Irish bank and the German bank, has 35 bn euro capital, making it one of the largest banks in Germany: it is one unit and it has branches all over Europe. All is centralized in one operation.
What about your digital bank in the UK, which already has more than 1,000 people. Are you going to do it in Europe as well?
Our retail bank is the biggest in the US, for us it always was an important business there. But to expand it internationally, previously it was almost impossible: we could not replicate that in Europe, it was too difficult. Digital banking is different, it allows us to participate in a market with our services, our name, and compete with other existing digital banks. We started in the UK, we launched the digital bank in September last year, and if we are successful, we will expand it in other countries. When we will do it, I cannot tell now: we do not know the sequencing of expansion to other countries. For sure we are not going to have a separate entity in Europe for the digital bank. I can say that the UK digital bank is growing according to our plans, actually even better than expected. At the moment we offer the basic banking products (savings account, current account, debit card, retail investment management via the recent acquisition of Nutmeg) but going forward we hope to add credit cards, personal lending and other products. This is something we have never done before, I hope this is going to work. So far so good.
Digital is definitely important for JP Morgan. How important are investments in IT, Artificial intelligence, FinTech and how can you keep under control costs, that rise with inflation, when you have to invest so much in digitalisation and AI?
Our total costs in IT are around 77 bn US dollars: we invest 12 bn dollars per year in technology, out of which 3 bn are for pure innovation. And our cost-to-income ratio is 50%. We have the benefit of being a profitable institution and this allows us to invest as much as needed without having to compromise on returns. We can prepare ourselves for the challenges of the future by investing today in technology, and also in the quality of people.We have our centres of excellence in AI. But we do not have only experts: we have about 50,000 people dedicated to technology. We aim at training everyone about the potential and power of AI. We measure the number of use cases in AI (i.e. know your client, reconciliation, trading algorithms) and this number is growing very fast. And we are adding more and more resources. Manuela Veloso, our head of AI research, is a super expert in robotics and she leads our AI lab with a group of 60 PhDs from top worldwide universities.
Are you moving as fast in the world of cryptoassets, stablecoins?In the big scheme of things, the current forms of cryptoassets and stablecoins is irrelevant. They may go up and down, who knows. What is relevant is the technology around them. The biggest mistake a company could make is not to be on the top of what is going on in the crypto space.. Our involvement is growing in this area too as the technology continues to evolve.
You said that JP Morgan can afford its huge investments in technology because the bank is profitable and has room on returns. You are targeting 17% RoTE this year. Can you manage this high return in such challenging times, the pandemic waves, a war in Ukraine, the Federal reserves raising rates by 75 bps risking a recession to tame inflation? How does the second quarter look?
In our guidance at the last Investor Day, we reconfirmed a 17%+ RoTE for this year, we said that investment banking fees will be down about 45% and markets will be up y/y 15-20%. Yes, the economic impact of the war in Ukraine is felt everywhere, but we are a very diversified company, so portions of our business may slow down as other businesses do well. So far it is fine. Volatility in the markets is a positive. We are heading into a challenging environment. Markets are correcting prices, in credit, in equities, but they are doing it in an orderly fashion and they are functioning: this is really good news. Markets are decompressing after a long period of time, this is good news too. We are not having a crash all of a sudden. It is going to be a challenging environment for the next 1-2 years, but at the moment the European economy and the US economy, they are performing well.
Is the orderly reaction of markets going to last in Europe?
Yes, look at the European equity markets, they are moving in a very similar way as the Us markets. They are coming down, some companies more than others depending on the sectors, but the market is functioning. You can buy and sell equities and bonds relatively ok. Clearly higher volatility widens the spreads because buying and selling is more expensive than it was, but again, the market is functioning.When you look at the strengths of banks today, in Europe and in the US banks are very well capitalized. They have plenty of liquidity. They are in a very different position to where they were in 2008. The ECB, the Fed, the regulators have done a very good job in making the banking system strong. Overall the system is in a good shape. But European banks have a problem of scale. Many are not big enough to produce decent profitability, so they trade at a discount to their book value.
The 75bps rise by the Federal reserve was needed?
It was expected by 90% of the market and they did it. And you can see at the moment markets are expecting by June 2023 in the US interest rates at 3,75%: this is one more hike than what the Fed mentioned, it mentioned 3.5%. Is that enough to curb inflation? We have to wait and see, time will tell. We will have to see how the economy and inflation reacts to interest rate hikes. Inflation will come down for sure because the economy is decelerating. But the issue here is: will it come down enough to hit the 2% target? If not, central banks will have to do more: more rate hikes, more aggressive Quantitative tightening. The CBs in US and Eurozone will have to adjust to see the impact of their measures. Inflation is not temporary anymore as it was thought at first: the war was a second supply shock, on agricultural commodities, on energy, and this made high inflation not temporary anymore, more broadly based. For central banks this is a problem and they are hopefully dealing with it.