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3 Reasons for JPMorgan's (JPM) Recent Acquisition Spree
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Of late, JPMorgan (JPM - Free Report) has been expanding through on-bolt acquisitions, both domestic and international. Over the past several months, the Wall Street giant has announced several buyouts that are an attempt to find revenue streams beyond traditional banking services.
Some of the notable transactions are approximately 75% stake in Volkswagen AG's (VWAGY - Free Report) payment arm – Volkswagen Financial Services – and OpenInvest, Frank, and 55ip (all FinTech start-ups). JPMorgan has already launched its digital retail bank Chase in the U.K. while announcing deals to acquire 40% stake in Brazil's C6 Bank, and the U.K.-based robo-advisor Netmeg. Earlier in 2019, JPMorgan had acquired InstaMed, which has enabled it to expand into the lucrative U.S. healthcare payments market.
Apart from these, JPMorgan, along with other global banks including Citigroup (C - Free Report) , Morgan Stanley (MS - Free Report) , UBS Group AG, and Goldman Sachs, is trying to capitalize on the opportunity to expand in China’s $53-trillion financial market, which is now open to foreign firms following the removal of restrictions on ownership. This August, it received regulatory approval to obtain full ownership of its China securities joint venture – J.P. Morgan Securities (China) Co.
At that time, CEO Jamie Dimon had stated, “China represents one of the largest opportunities in the world for many of our clients and for JPMorgan Chase. Our scale and global capabilities give us a unique ability to help Chinese companies grow internationally and also support global investors as they expand into China’s maturing capital markets.”
Per the data available from Refinitiv, Dealogic, and media reports, it is estimated that JPMorgan has acquired and invested in more than 30 companies so far this year. This is the most since 2012 when this Zacks Rank #2 (Buy) bank had inked more than 35 deals. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
While so much is being discussed about JPMorgan’s recent expansion plans, today we are trying to understand the reasons for its recent binge.
1. Counter Low Interest Rates: Since March 2020, the Federal Reserve has kept the interest rates at near-zero to support the U.S. economy from the coronavirus-related mayhem. Though in its September FOMC the central bank hinted at raising rates in late 2022, the low interest rate environment and continued weak demand for loans have hurt JPMorgan’s net interest income (NII) growth and resulted in the contraction of net yield on interest-earning assets over the past several quarters. For 2021, management anticipates NII to be approximately $52.5 billion, down almost 4% from the 2020 level.
While this dismal macroeconomic scenario is not expected to reverse anytime soon, JPMorgan is making efforts to boost non-interest income, which supported its financials in 2020. Last year, non-interest income grew 12% on the back of a boom in trading and investment banking (IB) operations. While trading is normalizing, IB business and other fee-generating operations are expected to keep up the momentum, at least over the next few quarters.
2. Compete With FinTechs: Banking sector as a whole is facing competition from FinTechs. Several big tech names including Amazon, Google, and Square Inc., among others, are trying to come up with some sort of business that will compete with traditional banks. Though it is well-known that these firms can’t directly serve clients by providing banking services thanks to strict banking regulations, banks like JPMorgan are increasingly facing pressure to technologically upgrade offerings. Thus, the company is heavily investing in artificial intelligence and other digital platforms, and even partnering/acquiring providers of such services as there has been a significant rise in demand for these amid the coronavirus pandemic.
3.Scale Up Operations: With its huge size (more than 4,800 branches) and global presence, JPMorgan has all the means to further scale up its businesses. However, given its size, the company is not allowed to take over another bank owing to regulations. Now, the COVID-19 pandemic has given the company an opportunity to leverage its scale by filling up gaps in its offerings by undertaking such smaller deals, which doesn’t attract much regulatory scrutiny.
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3 Reasons for JPMorgan's (JPM) Recent Acquisition Spree
Of late, JPMorgan (JPM - Free Report) has been expanding through on-bolt acquisitions, both domestic and international. Over the past several months, the Wall Street giant has announced several buyouts that are an attempt to find revenue streams beyond traditional banking services.
Some of the notable transactions are approximately 75% stake in Volkswagen AG's (VWAGY - Free Report) payment arm – Volkswagen Financial Services – and OpenInvest, Frank, and 55ip (all FinTech start-ups). JPMorgan has already launched its digital retail bank Chase in the U.K. while announcing deals to acquire 40% stake in Brazil's C6 Bank, and the U.K.-based robo-advisor Netmeg. Earlier in 2019, JPMorgan had acquired InstaMed, which has enabled it to expand into the lucrative U.S. healthcare payments market.
Apart from these, JPMorgan, along with other global banks including Citigroup (C - Free Report) , Morgan Stanley (MS - Free Report) , UBS Group AG, and Goldman Sachs, is trying to capitalize on the opportunity to expand in China’s $53-trillion financial market, which is now open to foreign firms following the removal of restrictions on ownership. This August, it received regulatory approval to obtain full ownership of its China securities joint venture – J.P. Morgan Securities (China) Co.
At that time, CEO Jamie Dimon had stated, “China represents one of the largest opportunities in the world for many of our clients and for JPMorgan Chase. Our scale and global capabilities give us a unique ability to help Chinese companies grow internationally and also support global investors as they expand into China’s maturing capital markets.”
Per the data available from Refinitiv, Dealogic, and media reports, it is estimated that JPMorgan has acquired and invested in more than 30 companies so far this year. This is the most since 2012 when this Zacks Rank #2 (Buy) bank had inked more than 35 deals. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
While so much is being discussed about JPMorgan’s recent expansion plans, today we are trying to understand the reasons for its recent binge.
1. Counter Low Interest Rates: Since March 2020, the Federal Reserve has kept the interest rates at near-zero to support the U.S. economy from the coronavirus-related mayhem. Though in its September FOMC the central bank hinted at raising rates in late 2022, the low interest rate environment and continued weak demand for loans have hurt JPMorgan’s net interest income (NII) growth and resulted in the contraction of net yield on interest-earning assets over the past several quarters. For 2021, management anticipates NII to be approximately $52.5 billion, down almost 4% from the 2020 level.
While this dismal macroeconomic scenario is not expected to reverse anytime soon, JPMorgan is making efforts to boost non-interest income, which supported its financials in 2020. Last year, non-interest income grew 12% on the back of a boom in trading and investment banking (IB) operations. While trading is normalizing, IB business and other fee-generating operations are expected to keep up the momentum, at least over the next few quarters.
2. Compete With FinTechs: Banking sector as a whole is facing competition from FinTechs. Several big tech names including Amazon, Google, and Square Inc., among others, are trying to come up with some sort of business that will compete with traditional banks. Though it is well-known that these firms can’t directly serve clients by providing banking services thanks to strict banking regulations, banks like JPMorgan are increasingly facing pressure to technologically upgrade offerings. Thus, the company is heavily investing in artificial intelligence and other digital platforms, and even partnering/acquiring providers of such services as there has been a significant rise in demand for these amid the coronavirus pandemic.
3.Scale Up Operations: With its huge size (more than 4,800 branches) and global presence, JPMorgan has all the means to further scale up its businesses. However, given its size, the company is not allowed to take over another bank owing to regulations. Now, the COVID-19 pandemic has given the company an opportunity to leverage its scale by filling up gaps in its offerings by undertaking such smaller deals, which doesn’t attract much regulatory scrutiny.