JPMorgan Chase, Wall Street’s biggest lender, said it plans to dramatically increase spending on technology and talent to bolster its competitive position, sparking investor concern over U.S. bank earnings in 2022.
As it reported record profits last year, JPMorgan stunned analysts with a forecast that spending would rise 8% this year to around $77 billion, meaning it would likely miss a key profitability target. in 2022, and possibly in 2023.
Part of the high spending comes from higher pay, with an additional $2.5 billion earmarked for compensation and travel expenses. But JPMorgan also said it plans to increase new investment this year by $3.5 billion, or 30%, to nearly $15 billion. Technology spending in 2022 will hit $12 billion in 2022, he said.
“Global spending on technology is around $12 billion, that’s an astonishing number,” said Edward Jones analyst James Shanahan. “It probably blows up the cumulative dollar value of the investments of all the fintechs in the world trying to disrupt them.”
Shares of JPMorgan, which have nearly doubled since the depths of the pandemic, fell more than 6% on Friday. It also rattled the share prices of other major banks that are expected to report earnings next week, with Morgan Stanley down 3.6%, Goldman Sachs 2.5% and Bank of America down 1.7%.
Jamie Dimon, 65, who has earned a reputation for cost control as chief executive of JPMorgan since 2005, told analysts the bank would have to “spend a few dollars” to beat its competitors.
However, the spending plans prompted Mike Mayo, a banking analyst at Wells Fargo who has recommended JPMorgan to clients for the past seven years, to downgrade the bank’s shares, in the absence of any performance metrics tied to the increase in expenses.
“Even Jamie Dimon, one of the best bankers of his generation, doesn’t get a free pass to cut capital spending in half over three years without giving more granularity about the expected benefits,” Mayo said. .
JPMorgan is ramping up spending just as a surge in deal activity that has produced record investment banking revenues is starting to wane. Investors had hoped that higher interest rates – and higher rates on loans – would help compensate, but instead much of that benefit will now go to funding new investment.
The heavy spending reflects pressure on banks to compete with fintech companies such as payments processor Stripe, installment lender Affirm and challenger bank Chime.
Jeremy Barnum, chief financial officer of JPMorgan, said the bank was in a “moment of acceleration” in capital spending. “Part of that is the degree of competition in the market,” Barnum said on a call with reporters, “particularly from new entrants.”
JPMorgan is allocating new funds to data centers and cloud computing as well as expansion into new markets like the UK and marketing costs.
Executives say investing in technology today will ultimately translate into lower operating costs. But it could take years to realize those savings, and the lack of granular detail is a source of frustration for investors.
“You, as a shareholder, as an outsider, will never be able to tell the difference between capital expenditure and just old expenditure until three years later. So you just have to believe it,” said Chris Kotowski, banking analyst at Oppenheimer & Co.
Following fourth-quarter results from Citigroup, which has already spent heavily on bolstering its technology under regulatory pressure following incidents at the bank, CFO Mark Mason called the technology a “very important growth line” in the bank’s expenditure base, without giving a precise forecast.
Shares of the bank closed down 1.25% on Friday.
Meanwhile, Wells Fargo shares rose 2% after the bank announced its revenue rose 12% in the fourth quarter as it sought to recover from a fake accounts scandal. The bank said its spending is likely to be lower than in 2021, although it plans an additional $1.2 billion in investments in technology and compensation.