Financial Highlights
As of or for the year ended December 31,
(in millions, except per share, ratio data and headcount) 2013 2012
Reported basis(a)
Total net revenue $ 96,606 $ 97,031
Total noninterest expense 70,467 64,729
Pre-provision profit 26,139 32,302
Provision for credit losses 225 3,385
Net income $ 17,923 $ 21,284
Per common share data
Net income per share:
Basic $ 4.39 $ 5.22
Diluted 4.35 5.20
Cash dividends declared 1.44 1.20
Book value 53.25 51.27
Tangible book value(b) 40.81 38.75
Selected ratios
Return on common equity 9 % 11 %
Return on tangible common equity(b) 11 15
Tier 1 capital ratio 11.9 12.6
Total capital ratio 14.4 15.3
Tier 1 common capital ratio(b) 10.7 11.0
Selected balance sheet data (period-end)
Loans $ 738,418 $ 733,796
Total assets 2,415,689 2,359,141
Deposits 1,287,765 1,193,593
Total stockholders’ equity 211,178 204,069
Headcount 251,196 258,753
(a) Results are presented in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), except where otherwise noted.
(b) Non-GAAP financial measure. For further discussion, see “Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures” and “Regulatory capital” in this Annual Report.
Financial Highlights
JPMorgan Chase & Co. (NYSE symbol: JPM) is a leading global financial services firm and one of the largest banking institutions in the United States of America (U.S.), with operations worldwide; the firm has $2.4 trillion in assets and $211.2 billion in stockholders’ equity. The firm is a leader in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, asset management and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase & Co. serves millions of consumers in the U.S. and many of the world’s most prominent corporate, institutional and government clients under its J.P. Morgan and Chase brands.
Together we can.
communities
clients
customers
employees
veterans
nonproits
business owners
schools
hospitals
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Dear Fellow Shareholders,
What a year. Despite tremendous challenges, your company earned $17.9 billion in net income on revenue of $96.6 billion in 2013. Our inancial results relected strong underlying performance across our four main businesses — unfortunately marred by signiicant legal settlements largely related to mortgages. These legal expenses cost the company $8.6 billion after-tax. Excluding these expenses and some one-time positive beneits from reserve reductions (which we never have considered true earnings) and one-time gains on the sale of assets, your company earned about $23 billion.
As tough as the year was — the company was under constant and intense pressure — I can hardly express the admiration, even pride, I feel because of the enduring resolve and resiliency of our management team and our employees. They never wavered as they attacked our problems while maintaining a relentless focus on serving our clients. We all owe them a great deal of gratitude.
The bad news was bad. The most painful, diicult and nerve-wracking experience that I have ever dealt with professionally was trying to resolve the legal issues we had this past year with multiple government agencies and regulators as we tried to get many large and risky legal issues behind us, including the Chief Investment Oice (CIO) situation (that happened in 2012) and mortgage-related matters (that happened
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primarily in 2005-2008, a signiicant portion of which occurred at heritage Bear Stearns and Washington Mutual (WaMu)).
There is much to say and a lot to be learned in analyzing what happened, but I am not going to do so in this letter — more distance and perspective are required. Suice it to say, we thought the best option, perhaps the only sensible option — for our company, our clients and our shareholders — was to acknowledge our issues and settle as much as we could all at once, albeit at a high price. This allowed us to focus on what we are here for: serving our clients and communities around the world.
The good news is that our four franchises maintained — and even strengthened — our leadership positions as we continued to gain market share and improve customer satisfaction in every business.
When I look back at our company last year with all of our ups and downs, I see it as A Tale of Two Cities: “It was the best of times, it was the worst of times.” We came through it scarred but strengthened — steadfast in our commitment to do the best we can.
And we believe that we continued to deliver for our shareholders. For Bank One shareholders since March 27, 2000, the stock has performed far better than most inancial companies and the Standard & Poor’s 500 Index (S&P 500). And since the JPMorgan Chase & Co. merger with Bank One on July 1, 2004, we have performed well vs. other inancial companies and slightly below the S&P 500. The details are shown in the tables on the following page. One of the tables also shows the growth in tangible book value per share, which we believe is a conservative measure of value. You can see that it has grown far more than the S&P 500 in both time periods.
2013 2012 2011 2010 2009 2008 2007 2006 2005
$21.96 $18.88 $16.45
$22.52 $27.09
$30.18 $33.69
$38.75 $40.81
Net income DilutedEPS
2013 2012 2011 2010 2009 2008 2007 2006 2005
$15,365
$5,605 $11,728
$18,976 $21,284
$17,923
$4.33 $14,444
$4.00
$1.35 $2.26
$3.96 $4.48
$5.20
$4.35 $17,370
$8,483
$2.35
Earnings and Diluted Earnings per Share 2005–2013
($ in millions, except diluted EPS)
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Here’s what most of the headlines left out: JPMorgan Chase continued to serve our clients and make a signiicant positive impact on our communities. In 2013, the irm
provided credit and raised capital of more than $2.1 trillion for our clients. The irm also has hired more than 6,300 military veterans since 2011 as a proud founding member of the 100,000 Jobs Mission, which now has increased the goal to 200,000 jobs. Our irm was there to help small businesses — we provided $19 billion of credit to U.S. small businesses, which allowed them to develop new products, expand their operations and hire more workers. We also were there for families to buy their irst home with a mortgage we made possible — overall, we originated more than 800,000 mortgages last year. In total, we provided $274 billion of credit to consumers. Our strength allows us to be there for our clients and communities in good times — and, more important, in bad times. In this, we have never faltered.
Stock and Book Value Performance
Stock Total Return Analysis
Bank One S&P 500 S&P Financials Index
Performance since becoming CEO of Bank One (3/26/2000–12/31/2013)(a):
Compounded Annual Gain 10.4% 3.3% 1.3%
Overall Gain 289.8% 57.3% 19.3%
JPMorgan Chase & Co. S&P 500 S&P Financials Index Performance since the Bank One
and JPMorgan Chase & Co. merger (7/1/2004–12/31/2013):
Compounded Annual Gain (Loss) 7.2% 7.4% (0.5)%
Overall Gain (Loss) 94.1% 97.5% (5.0)%
These charts show actual returns of the stock, with dividends included, for heritage shareholders of Bank One and JPMorgan Chase & Co. vs. the Standard & Poor’s 500 Index (S&P 500) and the Standard & Poor’s Financials Index (S&P Financials Index).
(a)On March 27, 2000, Jamie Dimon was hired as CEO of Bank One
Bank One/JPMorgan Chase & Co. Tangible Book Value per Share Performance vs. S&P 500
Bank One (A)
S&P 500 (B)
Relative Results (A) — (B) Performance since becoming CEO of Bank One
(3/26/2000–12/31/2013)(a):
Compounded Annual Gain 12.9% 4.6% 8.3%
Overall Gain 385.7% 80.4% 305.3%
JPMorgan Chase & Co. (A)
S&P 500 (B)
Relative Results (A) — (B) Performance since the Bank One
and JPMorgan Chase & Co. merger (7/1/2004–12/31/2013):
Compounded Annual Gain 14.5% 7.4% 7.1%
Overall Gain 261.9% 97.5% 164.4%
Tangible book value over time captures the company’s use of capital, balance sheet and profitability. In this chart, we are looking at heritage Bank One shareholders and JPMorgan Chase & Co. shareholders. The chart shows the increase in tangible book value per share; it is an after-tax number assuming all dividends were retained vs. the S&P 500 (a pre-tax number with dividends reinvested).
55 Corporate Clients 20% (9)% 20%
Small Business 52% 18% (8)%
Card & Auto 10% (10)% 12%
Commercial/ 18% 11% 8% Middle Market
Asset 48% 41% 17% Management
Mortgage/ (5)% 22% (7)% Home Equity
Total Consumer & 13% 17% 5% Commercial Banking
'10 to '11 '11 to '12 Year-over-Year Change
'12 to '13
2013 2012 2011
2010 2010 2011 2012 2013
$165 $67 $93 $83
$156 $100 $110
$91
$191 $141 $122 $82 $419
$474 $556
$20
$177 $165 $131 $92
$583 $18
$11 $17
$1.2 $1.4
$1.3 $1.5
Our clients also exhibit their faith in us by entrusting us to take care of their money — either as deposits or as client assets entrusted to us — as shown in the chart below.
New and Renewed Credit and Capital for Clients
at December 31,
Assets Entrusted to Us by Our Clients
at December 31,
Corporate Clients ($ in trillions)
Consumer and Commercial Banking ($ in billions)
Deposits
Consumer 7% 10% 6%
Wholesale 31% 3% 9%
Client assets(a) 5% 10% 13%
'10 to '11 '11 to '12 Year-over-Year Change
'12 to '13
Deposits and Client Assets ($ in billions)
2013 2012
2011 2010
$1,942 $558 $372
$2,035 $730 $398
$2,244 $755 $439
$2,534 $824 $464 $3,163
$3,438
$3,822
Assets under custody(b) ($ in billions)
$16,120 $16,870 $18,835 $20,485 $2,872
(a) Client assets include assets under management,
custody, brokerage, administration accounts and all Chase Wealth Management assets not managed by Asset Management
(b) Represents activities associated with the
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In this letter, I will discuss the issues highlighted below. I also encourage you to read the letters written by several of our business leaders about our main businesses, our critical operations and controls, and some of our corporate responsibility eforts.
As usual, this letter will describe some of our successes and opportunities, as well as our challenges and issues. The main sections of the letter are as follows:
I. We face the future with a strong foundation and excellent franchises built to serve our clients
II. We will dedicate extraordinary efort in 2014 adapting to the new global inancial architecture
III. We have made signiicant progress strengthening our company
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During 2014, most of the contours of the new and complex global inancial architecture will be put in place. The changes are exten-sive – and later in this letter, I will talk about just how extensive they are. All banks will have to adjust to the new rules, which will be harder for some than for others. Some may have to make drastic changes to their busi-ness plan and strategies. So as we enter the year, we should take stock of where we stand.
We have consistently shown good inancial performance and maintained our fortress balance sheet
All of our businesses have had good – in fact, close to best-in-class – inancial perfor-mance over the last several years in terms of
I . W E FAC E T H E F U T U R E W I T H A ST R O N G FO U N DAT I O N
A N D E XC E L L E N T F R A N C H I S E S B U I LT TO S E RV E O U R
C L I E N TS
margins and returns on tangible common equity. We have done this while meeting increasingly higher standards in liquidity and capital. Our fortress balance sheet is stronger than ever.
We have an enormous amount of what we consider highly liquid assets
First and foremost are the High Quality Liquid Assets (HQLA), shown in the chart below, which are mostly deposits at central banks, agency mortgage-backed securities and Treasuries. Only HQLA count for liquid assets under the banking regulators’ deini-tion of liquidity. These assets are super safe and can provide cash to the company should it need cash in a crisis situation.
Cash and High Quality Securities
at December 31, ($ in billions)
2013 2012
$588
$173
$239
$176
$741
$141
$244
$356
Cash1 (mostly deposits at central banks)
HQLA-eligible securities2
Additional marketable securities held in the investment securities portfolio (excluding trading assets)3
Liquid Assets =
1 Represents total amount of cash reported on the balance sheet, including $294 billion and $120 billion of eligible cash included in
HQLA in the Basel III Liquidity Coverage Ratio at December 31, 2013 and 2012, respectively
2 HQLA is the estimated amount of assets the irm believes will qualify for inclusion in the Basel III Liquidity Coverage Ratio and primarily
includes U.S. agency mortgage-backed securities, U.S. Treasuries, sovereign bonds and other government-guaranteed or government- sponsored securities
3 Additionally, the irm has other unencumbered marketable securities available to raise liquidity if required.
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In addition to the HQLA securities, other unencumbered marketable securities can provide signiicant liquidity for the company. (This category does not include any securities held in our trading port-folio.) Our investment securities portfolio has an average duration of 2.8 years and an average AA+ rating. The majority of securi-ties balances presented above reside in our investment securities. These securities could be utilized to provide liquidity and a source of cash for the company if necessary.
Our total assets are $2.4 trillion so you can see just how liquid our balance sheet is. As a reference point, our cash and high-quality securities are essentially the same as the $740 billion of our total loans. This is a very conservative utilization of our total deposits of approximately $1.3 trillion.
We have increasingly strong capital ratios You can see on the capital chart below that under Basel I, our Tier 1 Common has gone from 7.0% to 10.7% from 2007–2013 (if Basel I had been consistently applied, that
number would have been 11.8%), and our new Basel III ratio has gone from 5.0% to 9.5% over that same time period.
In 2014, we will meet all of our current targets in capital, liquidity and leverage. One ratio not shown in the chart is called the Supple-mentary Leverage Ratio (SLR) that is, simply, the ratio of equity to assets and certain of-balance sheet exposures, regardless of the quality of assets. While that calculation still is being inalized, we currently are at 4.6% vs. a requirement of 5%. We intend to have a cushion over 5% by the end of this year.
We have good returns on capital despite increasingly higher capital ratios
Even with the increasingly higher capital ratios over the past several years, all of our main businesses have been earning strong returns on tangible equity (see Return on Equity (ROE) chart on the following page). Some of our competitors are not earning similar returns, and they likely will feel more pressure to alter their business strategies going forward.
JPMorgan Chase Capital Levels
2014 Projection 2013
2012 2011
2010 2009
2008 2007
Basel I Tier 1 Common Basel III Tier 1 Common1
Basel I Tier 1 Common Projection3
7.0% 7.0%
9.8% 10.1%
11.0%
9.5%
10.0% + Target4 8.7%
11.8%2 12.3%
7.9%
7.0% 6.4%
4.7% 5.0%
10.7%
11.3%
8.8%
1 Through 2013, Basel III capital ratios relect the irm’s best estimate based on its understanding of the rules in the relevant period
(2007-2008 ratios are pro forma)
2 Relects the irm’s estimated Basel I capital ratio, excluding the impact on the irm’s positions as of December 31, 2013 of Basel 2.5
market-risk rules, which became efective January 1, 2013
3 Efective January 1, 2014, the Basel I ratio is no longer a regulatory capital measure. The ratios shown relect an approximation of what
the irm’s Basel I capital ratio would be as of December 31, 2014, both including and excluding the impact of Basel 2.5 market-risk rules, were Basel I still in efect
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1 Calculated based on gross
domestic investment banking revenue for syndicated leverage inance, mergers and acquisitions (M&A), equity underwriting and bond underwriting
Later in this letter, I will discuss how we think all the new rules will afect our returns.
Our scale and breadth create large cross-sell opportunities and strong competitive advantage
Each of our four major businesses oper-ates at good economies of scale and gets signiicant additional advantages from the other businesses. We believe this is one of the key reasons we have maintained good inancial performance.
Below are some pretty powerful examples:
• Our North America Investment Bank generates 29% of its investment banking revenue1 through Commercial Bank clients covered locally. This helps both our Investment Bank and our Commercial Bank do a better job serving their clients.
• Our Global Corporate Bank helped generate $1.3 billion in revenue for our ixed income sales and trading operation, increasing business to our trading desks and helping them ofer better pricing to our clients.
• Our Private Bank gets new clients from both our Investment Bank and our Commercial Bank. And the Private Bank and Commer-cial Bank would have a hard time existing without our Chase retail branch network. In fact, 55% of Commercial Bank clients and 35% of Private Bank households visit our retail branches each quarter.
• Of our $1.6 trillion of assets under management, approximately $300 billion comes from the Corporate & Investment Bank (CIB), the Commercial Bank or the Consumer Bank.
• Fifty-ive percent of retail mortgages and 40% of Chase-branded credit cards are sold through the retail branches.
In total, we believe that the combination of our businesses accounts for $15 billion of additional revenue, which helps drive both proits and customer satisfaction. Each of our businesses would be worse of but for the other three.
Our capabilities are extraordinary and are diicult to replicate — we can bring huge resources to bear for the beneit of our company and our clients Our scale creates huge cost eiciencies and enables signiicant resources to be brought to bear for the beneit of our company. For example, in global technology, we have nearly 30,000 programmers, application developers and information technology employees who keep our 7,200 applications, 32 data centers, 58,000 servers, 300,000 desk-tops and global network operating smoothly for all our clients. Resources like these allow us to constantly improve our operating eiciencies and bring enormous capability to deal with issues when we need to do so such as adjusting to all the new global rules and requirements. In total, we believe that expense synergies across the company save us approximately $3 billion a year.
Return on Equity
Excluding significant items(c)
2011 2012 2013 2013
JPMorgan Chase & Co. (ROTCE(a)) 15% 15% 11% 15%
ROE by line of business
Consumer & Community Banking 15% 25% 23%
Corporate & Investment Bank 17% 18% 15%(b)
Commercial Banking 30% 28% 19%
Asset Management 25% 24% 23%
Corporate/Private Equity 0% (3)% (9)%(d)
(a) Represents return on tangible common equity
(b) Excluding funding and debit valuation adjustments (FVA and DVA), CIB ROE was 17% in 2013
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Across the irm, we serve approximately 50% of U.S. households, approximately 80% of Fortune 500 companies, and 60% of the world’s largest pensions, sovereigns and central banks. Today, our irm has on-the-ground operations in 60 countries and serves clients in more than 100 countries around the world. To support those clients, we move up to $10 trillion a day and lend or raise capital of over $500 billion each quarter. The markets in which we operate cover 5.6 billion people who speak 100+ languages and use close to 50 currencies. It would be diicult to replicate the size, capabilities and knowledgeable staf of our businesses glob-ally. We can help our clients when and where they need it.
It is important to remember our capabili-ties and eiciencies accrue to our clients – over time, they get the beneit in improved pricing or better services.
This has led to increasing market share and customer satisfaction in all of our main businesses
None of the things previously mentioned would matter if they didn’t help us do a better job for our customers. You know your business model is working when customers – voting with their feet – give you more busi-ness. Increasing market share and customer satisfaction may not always immediately show on the bottom line – but both are crit-ical to the future growth of our businesses and drive current and potential earnings power of the company. The bullet points that follow say it strongly.
Consumer & Community Banking
• Total deposits of $453 billion up 10% from the prior year – more than two times the industry average.
• #1 credit card issuer in the U.S. based on loans outstanding. Record credit card sales volume of $420 billion was up 10% from the prior year – outpacing the industry in sales growth for 23 consecutive quarters.
• #1 in customer satisfaction among the largest banks for the second year in a row, as ranked by the American Customer Satisfaction Index (and, in the future, we want to be #1 among all banks).
• Customer attrition at an all-time low.
• #1 in customer satisfaction in small busi-ness banking in three of four regions of the U.S. by J.D. Power and Associates and #1 Small Business Administration lender for the fourth year in a row.
• #1 online inancial services destina-tion (chase.com) (per compete.com as of December 2013).
• #1 mobile banking functionality (Forrester Research’s 2013 Global and U.S. Mobile Banking Functionality Rankings).
• #1 ATM network; #2 retail branch network.
Corporate & Investment Bank
• #1 in Global Investment Banking Fees.
• #1 Fixed Income Market revenue share of top 10 investment banks; #1 Total Markets revenue share of top 10 investment banks.
• #1 in Global Long-Term Debt.
• #1 in Global Loan Syndications.
• #1 in U.S. Announced M&A.
• #2 in Global Equity and Equity-Related; #2 in Global Announced M&A.
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• Several groundbreaking transactions, including transformational deals for Verizon, Sprint, Facebook, Virgin Media and the University of California, to name just a few.
• #1 for both All-America Fixed Income Research and Equity Research – for the previous four years.
Commercial Banking
• #1 traditional Middle Market syndicated lender in the U.S.
• #1 multifamily lender in the U.S. – since 2008.
• Loan balances of $137 billion up 7% vs. the year before – relecting 14 consecutive quarters of loan growth.
• Gains in market share in our Middle Market expansion regions and within our commercial real estate businesses – as we deliver our capabilities locally in 119 U.S. cities and 13 international ones.
Asset Management
• Client assets of $2.3 trillion up by $248 billion from the year before – relecting 19 straight quarters of positive long-term inlows.
• Client assets double since the beginning of 2006.
• 80% of 10-year mutual fund assets under management in top two quartiles.
• #1 Ultra-High-Net-Worth Global Private Bank (Euromoney, 2013).
• #1 Institutional Money Market Fund Manager Worldwide (iMoneyNet, 2013).
We have never been a fair-weather friend — we hope that, over time, this builds more trust and respect
During the recent inancial crisis and throughout our 200-year history, JPMorgan Chase always has been there for our constitu-ents around the world – not only in good times but, more critically, in the toughest of times when strong banks are needed the most. However terrifying events became, we never wavered in supporting our clients and communities. In fact, we did many bold and unprecedented things, including acquiring Bear Stearns and WaMu. And we never stopped raising capital and providing credit for companies, nonproits, states, municipali-ties, hospitals and universities during times of trouble. And when the situation became very diicult in European countries such as Greece, Italy and Spain, we stayed to help our clients, which included the countries themselves. While we may make mistakes along the way, we never lose sight of why we are here. We believe that our long-term view and consistent behavior earn us the trust and respect of our clients and the communities in which we operate.
Our strategy remains the same — and we always invest for the long run
While we need to make a lot of adjustments to adapt to the new world (I will discuss later in this letter how we intend to do that), we are fortunate not to have to do a strategic reset. Our strategies have worked – a consis-tent strategy properly executed is important for the long-term success of any company.
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II. WE WILL DEDICATE EXTRAORDINARY EFFORT IN 2014
ADAPTING TO THE NEW GLOBAL FINANCIAL ARCHITECTURE
While we will meet all of our new capital and liquidity requirements this year, we still have an enormous amount of work to do to conform and adapt to the plethora of new global rules.
The changes are substantial and will require signiicant changes to business practices
A quick look at the chart on the next page will give you a sense of the enor-mous number of new rules and reporting requirements with which we need to comply. They are global and range from the new European Union (EU) Markets in Financial Instruments Directive (MiFID) rules to the 398 Dodd-Frank rules to the Basel III capital and liquidity require-ments, the Volcker Rule, and new mort-gage rules around both origination and servicing, to name just a few. Fully complying with and adapting to the new world is a daunting task and will require enormous efort and energy on the part of all of us at JPMorgan Chase. We are going to get it right – both to meet the letter and spirit of the new regulations and to mini-mize disruption to our clients.
These rules will afect every client, every product, every system and every country in which we operate. We do not underes-timate the extent of the changes. Never before have we focused so much time, technology, money and brainpower on such an enterprise-wide undertaking. In the end, all these eforts will make us a better and stronger company.
Importantly, these new regulations in total have unquestionably made the global banking system safer, more transparent and more accountable – which is good for everybody. Every bank is far better capi-talized than in the past, and the liquidity in the system probably has never been higher. In addition, the new rules around
minimum unsecured debt levels, the Recovery and Resolution plans (or so-called living wills), and the strengthened capabilities of the regu-lators have put an end, we hope, to the idea that anybody is “Too Big to Fail.”
We are applying enormous resources to the task
Reading the bullet points below will give you a sense of the time, money and manpower we are applying to adapt to the new rules:
• 13,000 employees will have been added since the beginning of 2012 through the end of 2014 to support our regula-tory, compliance and control efort (Risk, Compliance, Legal, Finance, Technology, Oversight and Control, and Audit) across the entire irm.
• 8,000of our employees across our lines of business will be dedicated solely to building and maintaining an industry-leading Anti-Money Laundering (AML) program.
• 500 professionals (and thousands of addi-tional contributors) were dedicated to the 2013 resubmission and 2014 submis-sion of the Federal Reserve’s capital stress test or Comprehensive Capital Analysis and Review (CCAR). These individuals developed and reviewed more than 100 new models and submodels; conducted over 130 independent qualitative and quantitative assessments of the irm’s forecast methodologies and results; and established new permanent functions and processes to enhance the irm’s overall capital planning process.
• 500 professionals globally across our lines of business and support functions are working on the irm’s annual Recovery and Resolution plans.
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New Financial Architecture
• 250+ employees are working in Model Risk and Development – up by more than 130 employees. In 2013, this highly specialized team completed over 450 model reviews, built capital models that enabled the irm to achieve the regulatory approval required to exit parallel Basel III reporting, and implemented a permanent new gover-nance and control structure for the proper creation and implementation of models.
• $600+ million has been spent on technology focused on our agenda in the Regulatory and Control space – an increase of approxi-mately 25% since 2011. We also have built a state-of-the-art control room in our corpo-rate headquarters to provide streamlined
data analysis and reporting capabilities of control and operational risk data across the irm.
• $2+ billionin additional expenses in our overall control efort will have been made since 2012 through the end of 2014.
The numbers above show some of the additional resources dedicated to this objec-tive but barely represent the full resources dedicated to our regulatory and control agenda. It is hard to estimate, but perhaps 20%-30% of all our Risk, Compliance, Legal, Finance, Technology, Oversight and Control, and Audit employees have been reassigned Description Selected requirements Selected JPMorgan Chase actions
Capital
CCAR stress testing, leverage and risk-based requirements
Improving the banking sector’s ability
to absorb losses arising from inancial and economic stress
750+ requirements with 21
regulators involved
~25 diferent capital ratio
requirements
500+ people
5,000+ pages of supporting
documentation
100+ new models
Liquidity
Liquidity Coverage Ratio and Net Stable Funding Ratio
Ensuring banks hold suicient liquid
assets to survive acute liquidity stress
Prevent overreliance on short-term
wholesale funding
258 requirements
15+ jurisdictional variations
expected
400+ people
5 billion records processed from
over 200 feeds
20+ million calculations performed
daily
Recovery and Resolution
U.S. Dodd-Frank1 Title I & II, UK2
Recovery and Resolution, EU BRRD3
Ensuring the resolvability of
systemically important inancial institutions
Preparing living wills
Resolution plans for 35
entities and plans by business, sub-business and for critical operations
1+ million work hours devoted
annually
Mortgages
U.S. Dodd-Frank1, Housing Finance
Reform Legislation
Reforming the nation’s housing
inance system
~9,000 pages of rules,
guidance and legislative text
~100,000 work hours of training
1+ million work hours dedicated to
system and process implementation
Securitization
Basel Revised Securitization Framework, Risk Retention, Regulation AB II
Enhancing capital requirements
and market standards for originators and investors
Improving the strength and safety of
securitization markets
2,000+ pages of proposals 35,000+ work hours dedicated
to system development to comply with Basel risk-weighted assets rules
Derivatives
U.S. Dodd-Frank1 Title VII, European
Market Infrastructure Regulation, Markets in Financial Instruments Directive II/Markets in Financial Instruments Regulation
Enhancing pre- and post-trade
transparency
Promoting the use of electronic
trading venues and central clearing
Bolstering capital and margin
requirements
83 key rules (U.S.) and 237
articles (EU) inalized
700+ people
60 workstreams
Volcker Rule Restricting banks from undertaking certain types of market activities
Insulating retail banking from
wholesale banking
1,000+ pages of rules
and preamble text with 5 regulators involved
36 requirements
300+ people
7 trading metrics in development
across 13 business areas
Note: This list of regulations is not comprehensive; estimates of resources are approximate
1 U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act 2 United Kingdom
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and will be devoted to this efort. In total, it is hard to measure the overall scope and investment since nearly all employees and systems are engaged in some way or another.
We will be applying the new rules all the way to the client level, the product level and the trading desk
We will be applying the new rules, particu-larly around capital, liquidity and the SLR (and the factors that increase our capital surcharge as a global systemically impor-tant bank), all the way down to each client we serve, each product we ofer and each trading desk we operate. Doing so will allow our client executives as well as product and trading managers to understand how the new rules afect us at a very granular level and allow our professionals to begin making proper and compensating adjustments. At the most basic level, some of these rules conlict with one another; for example, the client may be proitable on Basel III capital but not on SLR capital or vice versa. The binding constraint at the client level may be very diferent from the binding constraint at the irmwide level. To be successful, we will need to actively manage all these constraints so we get a fair return on our capital and properly manage our risks.
At the irmwide level, once we satisfy Basel III capital, SLR capital and the Liquidity Coverage Ratio, the binding constraints on the irm may very well become the CCAR test, the annual stress test from the Federal Reserve Board. By its nature, the CCAR test is less predictable because it will change every year. And while you can’t efectively manage stress testing at the client or product level, we will manage it at the business level so that it has more predictable outcomes, allowing for more predictable capital planning.
We are big believers in stress testing, and you should know that we do it all the time and successfully conduct a large number of diferent kinds of stress tests every week. This enables us to efectively manage risk to protect your company.
The new rules will have a major efect on certain clients and products
All the new rules will not afect all clients and all products equally. I obviously can’t cover all client types and products, but I would like to give some examples of those that may be afected more than most – and what that impact means for both JPMorgan Chase and our clients.
Derivatives. Non-corporate users of deriva-tives (asset managers, hedge funds, inan-cial companies, governments, etc.) will have to move all their standardized derivatives (mostly interest rate and credit derivatives) to exchanges, as opposed to handling them directly with a bank. Corporate end users of derivatives will be allowed to continue to trade bilaterally with a bank. However, for both of these segments, the cost to ofer derivatives to our various client groups will increase due to capital, liquidity and margin requirements imposed on us. It still remains to be seen how all this will sort out.
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unable to reform the government-sponsored enterprises (GSE) or to get the securitization markets healthy again. This has real costs to consumers, especially for lower credit-quality consumers and particularly for government-guaranteed mortgages, which have become more expensive, more time intensive and less available for consumers. Originators are being more conservative because making loans that may default has become far more risky and costly due to:
• The highly litigious environment and uncertainty surrounding Federal Housing Administration (FHA) guarantees with respect to FHA mortgages.
• The ongoing “put-back” risk and the litigation costs around reps and warranties from the GSEs and sophisticated private investors.
• The increasing prescriptiveness of rules on servicing from diferent – and sometimes conlicting – regulators and government agencies.
• The increasing diiculty of moving servicing – again, especially for high-risk loans, which often are unproitable to us and other large inancial institutions – to other servicers that have systems and processes better able to serve these customers.
These issues make mortgages more costly and unpredictable for companies and far less consumer friendly. In many cases, deserving lower- and middle-income consumers may pay far more than they might have in the past for a mortgage or, worse yet, they won’t be able to get one.
We need for all those involved in the mort-gage business to come up with a practical set of coherent and consistent policies that work for originators, servicers, investors, unproitable; therefore, over time, banks
probably will minimize this type of deposit, and clients will seek other alternatives, prob-ably in the money markets.
Committed, undrawn revolvers.Many clients have large, committed, unused revolvers so they can manage their cash lows and not leave too much unused cash on their balance sheet. Because new rules impose liquidity and additional capital requirements on committed, undrawn revolvers, the cost involved in providing them could increase by up to 60 basis points, depending on the client segment and nature of the facility. Banks will either have to charge more for this product or focus more acutely on the nature and value of the particular client rela-tionship as a whole in considering whether to make revolvers available to that client.
Trade inance.The cost of short-term trade inance and standby letters of credit also will increase dramatically, with pricing poten-tially up by 75 basis points in the long term.
The rates business (mostly trading government securities and interest rate swaps). The new rules have a huge efect on this business because they require substantially more capital and liquidity. And for some banks, the rates business has gone from proitable to unproitable, causing some banks to exit the business altogether. Because of our large volume and low costs, we already have begun to make signiicant changes to this business and expect to maintain decent proitability.
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consumers and regulators. While it’s crit-ical to protect the consumer, the new rules should not allow for arbitrary and capricious interpretations or overly punitive penalties and litigation.
When you look at how the cost of speciic products has changed, it’s easy to see how some clients will be afected more than others. While most clients will see some higher costs, certain clients – for example, municipalities (which will see far higher costs for certain types of deposits and credit lines), clients with large amounts of trade, credit-only clients and speciic types of inan-cial companies – will experience far higher costs to transact banking business.
We need to achieve proper cross-border regulatory coordination
One of the initial objectives of the global regulatory regime was to set out fairly consis-tent global rules; i.e., a level playing ield. The rules don’t have to be exactly the same in all countries, but if they are dramatically diferent, that could cause large and unfair distortions in global competition. Some areas at risk are: 1) dramatically diferent calcula-tions of risk-weighted assets, 2) much lower leverage ratios in some countries vs. others and 3) varying capital structures for a bank’s subsidiaries in diferent countries. We are convinced that the regulators want to get this right, but there are a lot of interests involved, and only time will tell if they succeed.
We need to recognize that models and risk-weighted assets do not relect all knowledge or judgment
We recognize the importance of detailed and disciplined modeling and forecasting, particu-larly around risk and risk-weighted assets. But we want our shareholders to know that even the best models provide an incomplete, some-times misleading and backward-looking view of risk. Let me list a few things that are not incorporated in risk-weighted asset models:
• Character of the borrower.
• Changes in the tax code.
• Changes in the structure of the industry (usually driven by technology – look at what the Internet did to media and some types of retail).
• Changes in business practices (for example, virtually no one ofers subprime mortgage lending anymore).
• Changes in government or regulatory policy.
• Geopolitical risk.
We need to do our math right, but we also need to remind ourselves to always try to add judgment and wisdom.
All things being equal, returns will be reduced
If you have to hold higher capital and higher liquidity and some of your costs are higher – all things being equal – your returns obvi-ously will come down. Many analysts have estimated that the average efect of the higher capital, liquidity and costs on banks will reduce their return on equity substantially and for some banks far below fair market returns. These banks possibly would need to take dramatic action – shareholders would not accept poor market returns for long.
But all things are not equal
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• Run-of of unproitable products. Banks simply will stop handling some very expen-sive products. For example, many exotic derivatives, subprime mortgages and other products no longer will be ofered.
• Product repricing. Some products will reprice. For example, we expect the cost to the client for revolvers and transactional deposits to go up.
• Product redesign.Some products will be redesigned. For example, uncommitted lines of credit (that were popular many years ago) may make a comeback. Or revolvers may be written so that the borrower cannot borrow all the money all at once, reducing the liquidity burden and cost to the bank.
• Client selection and re-optimization. Banks will focus on clients that can be served prof-itably with a mix of products and services. For example, we may seek to earn more of certain clients’ capital-lite business like cash management or a higher share of their fee-based business such as M&A or issuance. Some clients will go to other banks with a diferent mix of products and services, and some will be banked in the shadow banking market, which may be able to serve some clients in a less expensive way.
• Tactical and strategic changes.These changes are hard to forecast – but they will happen. Not all banks will adjust to the new world in the same way. Some banks will stop ofering certain products or will leave certain markets – market shares will change and, in some cases, consolidate. This eventu-ally should lead to margins in each product and business that are adequate for those that remain in the business.
• Return on equity. Some banks will continue to earn better-than-average ROEs. Not all companies are created equal, and in every industry that I have observed, some
compa-nies have outperformed for an extended period of time. Sometimes it is because these companies have lower cost struc-tures, better technology or simply greater economies of scale due to higher market share. It also is important to remember that a complex business that has many products is not earning the same ROE on every product. Many industries have historic structural issues that lead to some products being loss leaders (e.g., selling milk at grocery stores). And some products have an extremely high return because there is little equity involved (for example, think of money management, transaction processing, etc.). It is the combination of how a company does all these things that determines the company’s aggregate ROE.
In the past, we told you we would expect our average return on tangible equity through the cycle (by this, we mean in average times with normalized credit losses) to be 16%. With higher levels of capital, signiicant regulatory changes and some remaining uncertainties, we moved the number to be somewhere between 15% and 16%.
We continue to have a healthy fear of the unknown because we cannot predict the cumulative efect of so many changes on a complex system
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What we can predict is that we are going to have tough global competitors
We have a healthy fear of and respect for our competitors. No matter what business you’re in or how strong you might look, there are a lot of smart, devoted, tough competi-tors that have the potential to gain on you. So we always make the assumption that we will have tough competition. In addition to the regular lineup of great competitors that we currently have, I want to point out three areas (among others) that we will be keeping an eye on.
Large, global Chinese banks. Today, there are four very large and rapidly growing Chinese banks. They may be operating under less restrictive rules than we are. They are ambi-tious, and they have a strategic reason to go global (following their rapidly growing Chinese companies overseas). They have begun their global expansion, and, over time, they will become tough global competitors.
Technological obsolescence. It’s easy to be scared about this one. Many companies are working on new payment systems, trading has become increasingly electronic, customers want more and more mobile services, and, increasingly, companies are starting to handle lending online. Your company is deploying substantial resources and launching new programs and products and will try to be creative, innovative and nimble in all these areas, which we will talk more about in the last section of this letter.
Increasingly sophisticated shadow banks. We really should not call them “shadow” banks – they do not operate in shadows. They are non-bank inancial competitors, and there is a wide set of them. They range from money market funds and asset managers, mortgage
real estate investment trusts and mortgage servicers, and middle market lending funds to PayPal and clearinghouses. Many of these institutions are smart and sophisticated and will beneit as banks move out of certain products and services. Non-bank inancial competitors will look at every product we price, and if they can do it cheaper with their set of capital providers, they will. There is nothing inherently wrong with this – it is a natural state of afairs and, in some cases, may beneit the clients who get the better price. But regulators should – and will – be looking at how all inancial companies (including non-bank competitors) need to be regulated and will be evaluating what is better to be done by banks vs. non-banks and vice versa.
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We continue to make substantial progress strengthening our company. We have made enormous strides on our control agenda, which is detailed in a letter by our Chief Operating Oicer on pages 33-35. We have continued our disciplined organic growth while also simplifying our business and continuing to reduce expenses. But irst and foremost is the importance of maintaining the strength of our client franchises.
In this new global inancial architecture, we will protect our great client franchises — at the expense of proits, if necessary
As we adapt to all the new rules, we will deliberately maintain our franchises even at the expense of sub-optimal proits. Since we don’t know what the impact of all the new rules will be, we don’t want to guess or make major changes in strategy in anticipation of these new rules. If some of the changes cause disappointing proits in the short term, so be it. We are fairly convinced that we will be able to adjust and earn fair proits in the long run.
We are aggressively pruning and simplifying our business — allowing us to reduce risk and to focus our resources on what is important
In general, it is good for any company to diligently prune and simplify its business so that it can focus on what it does best. This is just simple good housekeeping. It is even more important in this environment, largely to help with the control agenda. The chart below notes that we are exiting certain products and businesses. None of these exits will afect our main franchises. These actions eventually will reduce revenue by about $3 billion, but they will have little impact on proits. Some of the businesses we are selling originally had great promise – and we still have no problem trying things (and failing at them) as long as we have the discipline to stop doing them if they don’t work. Some don’t it the new regulatory environment, some are not customer friendly and some are just simply too small to matter.
III. W E H AV E M A D E S I G N I F I C A N T P R O G R E SS
ST R E N GT H E N I N G O U R CO M PA N Y
Business Simplification
Simplifying our business
Exiting products non-core to our customers or with
outsized operational risk — for example:
One Equity Partners
Physical commodities
Global Special Opportunities Group
Student lending originations
Canadian money orders
Co-branded business debit cards and gift cards
Rationalization of products in Mortgage Banking1
Identity theft protection
Credit insurance
Discontinuing certain client businesses on a case-by-case
basis in light of the new global requirements
Financial impact of business simplification ($ in billions)
2014 impact Run-rate impact
Revenue $1.5 $2.8
Expense (0.9) (2.3)
Pre-tax income 0.6 0.4
Net income $0.3 $0.3
1 Not included in the analysis
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We still are investing in organic growth, and our investments from the past are paying of
As we have shown you in previous letters, the following nine investment initiatives (outlined in the chart below) will contribute to our proits over the next 10 years. All these projects are pretty much on track, and we expect they will provide substantial value for our clients and our shareholders in the future. Our current estimate is that they will add another $2 billion in proits by 2017. We like organic growth, and while we have not started as many major new initiatives this
year as in previous years so we can focus on our control agenda, there will be great opportunities in the future.
We continue to be vigilant about our expenses
Earlier, we spoke about the regulatory and control issues that, by year-end 2014, will have increased our overhead expenses by $2 billion since 2012. Our total overhead (except litigation) was $60 billion in 2013, and we expect it will be less than $59 billion in 2014. We expect to continue to drive down expenses as a percentage of revenue over
Overview of Select Investments
Expense and net income impact of cumulative spend from select investments ($ in millions)
Line of business Investment Status Comments
Target annual net income
Consumer & Community Banking
Branch builds ü Portfolio of branches opened from 2002–2012
Average branch contributes $1 million+ to pre-tax income when mature
4-year+/– breakeven and 7-year+/– payback for 2002–2012 portfolio
>$600
Business Banking ü Expansion market branches fully stafed
Approaching core market productivity levels
$600+/–
Chase Private Client ü Added 2,100+ Chase Private Client locations since beginning of 2011
22,000 clients as of 2011; 100,000+ clients as of 2012; 215,000+
clients as of 2013
$14 billion net new money in 2013
$600+/–
Corporate & Investment Bank
Over-the-Counter Clearing & Collateral Management
In progress Delivered a global platform and top three market share
Timing of steady state dependent on implementation of inal Europe,
Middle East and Africa and Asia Paciic rules
$150+/–
Global Prime Brokerage
build-out ü
Build out international platform to facilitate clients’ regional strategies
Successful launch of international prime brokerage in Europe, the Middle
East and Africa in 2011; Asia Paciic launch in 2014
$175+/–
Global Corporate Bank ü Committed to meeting needs of international clients
~200 bankers hired since 2009
$600+/–
Equities electronic
trading ü
Focused on building best-in-class electronic trading capabilities
Grew low-touch equities revenue at 21% CAGR since 2010
$100+/–
Commercial Banking
Middle Market expansion1 Ongoing Expand Commercial Banking coverage into new markets
New cities added in 2013 include Tacoma and Jacksonville
Continue to add ~200 clients per year
$450+/–
Asset Management
Private Bankers/ Investment Management sales expansion Investment Management business initiatives
Ongoing Hired ~700 Private Bank client advisors and ~300 Investment Management salespeople since beginning of 2010
Expansion investments contributed net income of ~$100 million in 2013
$800+/–
üIndicates investment complete 2013 expense2
2013 net income
~$2.6 billion
~$1 billion
~$4,100
Expect $3.5 billion+/– of net income in 2017 run-rate
1 Includes WaMu, as well as out-of-footprint expansion markets
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the years. We are not doing this by skimping on investments – we never will do that since we believe investments in technology, training, controls, efective marketing and other eforts are critical for the long-term health and growth of the company. We are driving down costs by being extremely vigilant on expenses – always seeking out ways to automate and improve eiciency and operations. While we don’t have a formal expense-cutting program, you can rest assured that we always are looking for ways to cut wasteful expenditures. We also believe that new industry utilities will emerge that will sharply reduce costs; for example, a utility could manage Know Your Customer processes (this way, corporate customers would not have to ill out the same forms and answer the same questions for all their banking partners). The inancial sector always has been a large user of industry-wide utilities, particularly with regard to processes like settlement, clearance and payments.
And we always are learning (which also will make us a stronger company)
We always have believed that analyzing your mistakes makes you a better company. We often are asked about some of the manage-ment lessons we’ve learned over the past few years so let me share a few of them with you.
Customer advocacy. Treat the customer the way you want to be treated and make sure you see everything from the customer’s eyes. Read customer complaints – and be the customer’s advocate. This acts as an early warning system, it reduces problems and it will make you a better company.
Constantly improving systems and processes. We always have believed in this, but there is an example of where we didn’t with our Anti-Money Laundering systems. For years, we scored fairly well on our AML program, but we did not continually improve our systems and processes, and, in hindsight, we fell behind. All systems and processes need to have regular review and continual improvement.
A tin ear. In the past few years, we had started to see regulatory and enforcement actions against our competitors – and saw signals from our regulators that things were going to get tougher going forward. Our response generally was, “We know what we’re doing.” Well, we should have done more self-examination. We need to be better listeners and do a better job at examining critiques of others so we can learn from other people’s mistakes, too.
Enterprise-wide controls. We generally have had a preference for leaving things some-what decentralized, if possible, to foster responsibility and innovation throughout the organization. We’ve prided ourselves on our controls, and, for the most part, we did them well. But not all critical controls were consistently executed throughout the irm – and they should have been. This reduces the chance of a control gap somewhere in the company, and it ensures a sustainable, rigorous discipline and process in place every-where. In addition to our fortress balance sheet, we want a fortress control system.
Processes should be known, front to back. From the moment a customer is opening his or her account to conducting business through the middle oice to properly recording that busi-ness on your books and records, you are only as strong as your weakest link. Management teams need to understand and review all the processes in their business.
Sustainability. It’s not enough for an activity to be done well – it needs to be done well on a sustained basis. This means a rigorous risk assessment, a constant review of all processes, properly functioning risk and control
committees, vigilant compliance and a thor-ough rechecking of everything by Audit.
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CYBERSECURITY UPDATE
In last year’s letter, I gave a frank assessment about cybersecurity and why it is such a critical priority for the entire company. We outlined how JPMorgan Chase had spent approximately $200 million in 2012 to protect ourselves from cyberwarfare and to make sure our data were safe and secure, and we dedicated more than 600 employees across the irm to the task. Despite these intense eforts, we acknowledged that the issue of cybersecurity worried us — and, today, that worry only has continued to intensify.
By the end of 2014, we will have spent more than $250 million annually with approximately 1,000 people focused on the efort. This efort will continue to grow exponentially over the years.
In our existing environment and at our company, cybersecurity attacks are becoming increasingly complex and more dangerous. The threats are coming in not just from computer hackers trying to take over our systems and steal our data but also from highly coordinated external attacks both directly and via third-party systems (e.g., suppliers, vendors, partners, exchanges, etc.). It appears that a large, successful attack on a major retailer last year was the result of a third-party system breach.
We are continuing to carefully protect our perimeter from external threats, beef up our processes to detect internal threats and monitor related third-party systems to make sure their protections are adequate. In addition, we are moving rapidly ahead with Europay Mastercard Visa (EMV) and tokenization for credit and debit card transactions, which we will need to do in conjunction with merchants. We also are building three state-of-the-art Cybersecurity Operations Centers in our regional headquarters to provide points of coordination for all incoming information, the identiication of threats, the protocol around managing our responses and the security of our buildings around the world. A major focus of these centers is the concept of intelligence fusion, which will pull together all our internal information from Internet and systems monitoring, as well as reconnaissance from our partners in industry and government. This approach will give us a comprehensive and consolidated view of all the threats facing our irm and our customers, and it will help to inform our view on how best to combat them.
We’re making good progress on these and other eforts, but cyberattacks are growing every day in strength and velocity across the globe. It is going to be a continual and likely never-ending battle to stay ahead of it — and, unfortunately, not every battle will be won. Rest assured that we will stay vigilant and do what we need to do to enhance our defenses and protect our company.
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In the last seven years, we have been through a global inancial crisis, massive regulatory changes and a number of setbacks – but our company has been able to recover and prosper. Most important, our client fran-chises consistently got stronger. All compa-nies, at some point, are going to have tough times. The ability of a company to overcome them and be better for having done so is a sign of its strength, not weakness.
As we navigate through 2014, our fortress company and the power of our franchises put us in good stead. We are in this busi-ness forever. And we need to look beyond current challenges so that we properly invest and plan for the future. When all is said and done, there is reason to believe that the future of banking will be quite good. The following paragraphs explain why.
The world has been getting better, not worse
It is hard to believe sometimes – when you read in the newspapers and see on TV all the terrible events happening on the planet – that the world has consistently, over the course of history, become a better place for human beings. A recent book by Harvard professor Steven Pinker entitled The Better Angels of Our Nature chronicles how mankind has made enormous progress and has improved society throughout the centuries. His research looks at issues like murder, torture and other acts of violence over the past thousands of years and shows how today’s world is much safer and more humane than in the past. It’s amazing that even the 20th century, bloodied by two world wars, was less violent than all other centu-ries before it. Cruelties such as torture and slavery over many, many years have become increasingly rare (though they tragically still exist). There are many contributing factors, but Pinker points out some of the reasons:
increasingly just and moral governments; the invention of new institutions like courts of law and police forces; and expansion of human knowledge and a heightened sense of morality spread by the written word, reli-gious institutions and schools, all of which have helped inluence people’s minds about what is acceptable – and what is not.
Dr. Martin Luther King said, “The arc of the moral universe is long, but it bends toward justice.” Progress, sometimes painful and slow, has been happening all around us all the time, and the optimist in me believes that it will continue.
We have an abiding faith in the United States of America
I have spoken about this in the past, and I don’t believe that it is blind optimism or patriotism. America today may be stronger than ever before. For example:
• The United States has the world’s stron-gest military, and this will be the case for decades. We also are fortunate to be at peace with our neighbors and to have the protection of two great oceans.
• The United States has among the world’s best universities and hospitals.
• The United States has a reliable rule of law and low corruption.
• The people of the United States have a great work ethic and “can do” attitude.
• Americans are among the most entre-preneurial and innovative people in the world – from those who work on the factory loors to geniuses like Steve Jobs. Improving “things” and increasing produc-tivity are American pastimes. And America still fosters an entrepreneurial culture where risk taking is allowed – accepting that it can result in success or failure.
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• The United States is home to many of the best businesses on the planet – from small and middle-sized companies to large, global multinationals.
• The United States also has the widest, deepest, most transparent and best inan-cial markets in the world. And I’m not talking just about Wall Street and banks – I include the whole mosaic: venture capital, private equity, asset managers, individual and corporate investors, and the public and private capital markets. Our inancial markets have been an essential part of the great American business machine.
America’s future is not guaranteed, and, of course, America has its issues. Later in this section, I will discuss some of the issues, especially the ones possibly holding back our country’s growth. But throughout history, we have shown great resiliency and a capacity to face our problems. Warren Bufett, the greatest investor of all time and my friend, has said, “It’s never paid to bet against America.” I think we all should take his advice.
The outlook for long-term growth is excellent — our clients are growing, and they need us
The inancial needs of countries, companies and individuals will continue to grow over time. And that growth will be broad based and global. A few examples suice.
GDP and trade
• World gross domestic product (GDP) is projected to grow an average of 7% per year through 2023, from $73 trillion in 2013 to $139 trillion in 2023.
• The value of the world’s exports grew at an average rate of 11% per year between 2002 and 2012, from $8.1 trillion to $22.8 trillion. Many economists expect international trade to grow faster than world GDP over time.
Infrastructure
• Keeping pace with global GDP growth will require an estimated $57 trillion in infra-structure investment between now and 2030 – this is 60% more than the $36 tril-lion spent over the past 18 years. Emerging economies are likely to account for 40% to 50% of this infrastructure spending.
• Infrastructure-related trade is forecast to grow by 9% per year on average between 2013 and 2030, outpacing overall merchandise trade growth of 8% per year so that by 2030, infrastructure-related trade will account for 54% of total goods traded globally.
Growth of large companies
• A staggering 7,000 new large companies (those with revenue greater than $1 billion) are expected to develop between 2010 and 2025; 70% are expected to be in emerging regions, with the share of large company revenue generated from those based in emerging regions rising from 24% in 2010 to 46% in 2025.
• By 2025, emerging regions are expected to be home to almost 230 companies in the Fortune Global 500, up from 85 in 2010. Of the 230 emerging region companies, 120 are expected to be based in the China region.
• Today, 80% of the 2,200 large compa-nies in emerging economies are spread across almost 100 cities; by 2025, 80% of the 7,000 large companies are likely to be spread across nearly 160 cities.
Urbanization and population growth
• A majority of the world’s population now lives in urban areas for the irst time in history, and by 2050, that number is expected to grow to 67%. This mass urbanization will create cities on a scale beyond what most of the world has seen. Providing the infrastructure and clean water, schooling, healthcare and social safety nets (to name just a few) to anticipate, accommodate and sustain this growth will be hugely challenging.
Financial assets
• Total global inancial assets of consumers and businesses grew to $248 trillion by the end of 2013 and are projected to grow at a compound annual growth rate of 6.6% through 2023 to roughly $453 trillion.
