Over the next few months, share prices of U.S. banks are likely to be in thrall to fears about the euro zone crisis.
One strategy for combating this uncertainty is to shutter bank branches and raise piddly ATM and checking fees across the board. But Jamie Dimon, JPMorgan Chase’s chairman and CEO, is taking a different approach to the search for new revenue. Last month he announced the national rollout of the Chase Private Client division, which offers personalized banking to households with assets of between $500,000 and $5 million.
By the end of next year, the bank hopes to have as many as 750 Private Client offices, serviced by more than 1,000 bankers and 300-plus dedicated financial advisers. Customers will be guided into discreet areas within existing branches. And they won’t be charged the standard fees for using other banks’ ATMs.
When announcing broadly flat third-quarter net income of $4.3 billion last month, JPMorgan also revealed $15.1 billion in exposure to the highly indebted economies of Greece, Ireland, Italy, Portugal and Spain.
As banks unveil ambitious new strategies in wealth management, credit cards and ATM services to compensate for the lackluster U.S. economy, this could be the time for equity investors to place bets on the strategies most likely to succeed. Indeed, UBS has been buoyed by the profitability of its private banking unit, which helped it turn an overall net profit despite a $2.2 billion third-quarter loss as a result of a notorious rogue trading incident (see article, page 7).
Amid the feverish hunt by private banks to add the richest Americans — the 700,000 or so households with more than $5 million in investable assets — to their client lists, the millions of affluent citizens the next rung down the ladder have often been missed. These potential clients inhabit a less competitive customer segment than the richer customers already served by JPMorgan’s private bank. “A $10 million client has a lot more people coming after him than a $2.5 million client,” says David Bauer, partner at Casey Quirk, a Darien, Connecticut, investment management consulting firm.
This view is echoed by Barry Sommers, CEO of Chase Wealth Management and head of Chase Private Client. He tells Institutional Investor?: “I think it’s a great market segment. It’s potentially less crowded, and these people really need advice and help, especially in these tough economic times.”
This slice of the market holds a further attraction. “This is a very profitable segment for the bank to service,” says Robert Testa, senior analyst at Cerulli Associates, a Boston financial services research company. “If you go really high-end, you have to increase the number of services you offer. The more services you offer, the more your margins go down.” As a result, margins for customers with more than $5 million are often lower than those for the less wealthy segment Chase Private Client is targeting.
Private banking clients with many millions of dollars have come to expect an enviable amount of pampering, which can include art appraisals, bill payments and even tickets to the U.S. Open, of which JPMorgan is a major sponsor. Private banks tend to view such services as part of their cost base. These typically vary from 0.75 to 1.5 percent of assets under management for both affluent and seriously rich customers.
JPMorgan holds a couple of trump cards as it enters this huge market, estimated by Cerulli at 9.5 million households with about $12 trillion in investable assets. The first is that 2 million people in this wealth bracket are already customers of JPMorgan’s retail arm. Sommers expects most of the Private Client business to come from them. Winning their business will be a lot easier than cold-calling, which financial advisers without this fertile hinterland must do. Private Client’s use of its existing customer base and branches will keep costs down, though the bank declines to say how much it is spending on the project. JPMorgan’s second advantage is its brand name, which was untarnished by the credit crunch. In wealth management a reputation for unassailable solvency is helpful.
There are negative as well as positive reasons for JPMorgan to favor expansion in wealth management instead of other areas. Earnings prospects from mortgages and capital markets look unpromising. JPMorgan’s total loan-loss reserve is $28.35 billion; $4.94 billion of this came with the acquisition of Washington Mutual. Company insiders believe the new business could eventually generate as much as $1 billion in net income annually, but not for at least a year.
— David Turner
