Extracts from shareholder letter from Jamie Dimon, chairman and CEO of JPMorganChase:

We are confronted with extraordinary global competition from both traditional and new challengers.

Our shareholders should recognize, as we do, that our company faces strengthened traditional competitors, including large banks in the United States, regional banks, strong international banks, large and successful money managers, and strong investment banks.

As I’ve detailed in previous letters, our rivals increasingly include a large and growing set of nontraditional and fintech competitors globally in areas such as payments, digital banking and investing, and global market making. I’m not going to mention all their names, but you can imagine that we study and track over a hundred of them.

While we have been able to grow, many but not all of the new players have been quite successful and continue to raise both money and their ambitions. In addition, a whole new set of competitors is emerging based on blockchain, which includes stablecoins, smart contracts and other forms of tokenization.

Our ongoing success will be based on our ability to wisely invest and move very quickly and nimbly, especially around product design and rollout, including incorporating artificial intelligence (AI) in everything we do. While much of what we do will remain the same — serving people and businesses needing to hold money, move money, invest money, raise money and manage their investments — new competitors and new technologies may change the fundamental nature of how all this is done.

AI, data and technology are key to the future, as is solving for how to implement AI properly and fast.

The importance of AI is real — and while I hesitate to use the word transformational — it is. The pace of adoption will likely be far faster than prior technological transformations, like electricity or the internet. Those took decades to roll out, but this implementation looks likely to accelerate over the next few years. Our Chief Operating Officer describes our efforts in more detail, but I want to make some key points here.

• We will not put our heads in the sand. We will deploy AI, as we deploy all technology, to do a better job for our customers (and employees).
• AI will affect virtually every function, application and process in the company. And in the long run, it will have a huge positive impact on productivity. I do not think it is an exaggeration to say that AI will cure some cancers, create new composites and reduce accidental deaths, among other positive outcomes. It will eventually reduce the workweek in the developed world. And people will live longer and safer.
• We do not yet know exactly how AI will unfold. The landscape will change rapidly, with shifting assumptions about power consumption, costs, chip technologies and the speed at which data centers are deployed. There will be a wide variety of AI models — open and closed, large and small — and no single tool will dominate. Overall, the investment in AI is not a speculative bubble; rather, it will deliver significant benefits. However, at this time, we cannot predict the ultimate winners and losers in AI- related industries.
• AI is a genuine technological shift that will impact many sectors, including physical industries and scientific research. AI is only beginning to be applied broadly in science, and its influence will continue to expand.
• AI will also introduce serious new risks — from deepfakes and misinformation to cybersecurity vulnerabilities. These risks are real, but they are manageable if companies, regulators and governments prepare. The worst mistakes we can make are predictable: overreact at the first serious incident and regulate out important innovation or underreact and fail to learn from what went wrong. The right approach requires rigorous preparation in advance, an honest assessment when things go wrong — and they will — and discipline to fix what’s broken without destroying what works.
• AI will definitely eliminate some jobs, while it enhances others. Our firm will have definitive plans on how we can support and redeploy our affected workforce.
• AI will create many jobs — some we can see today in cybersecurity and AI itself, and some we can’t see. But we do know that there is a huge workforce shortage for many well-paying white- and blue-collar jobs.
• There is a possibility that AI deployment will move faster than workforce adaptation to new job creation. In prior technological transformations, labor had time to adjust and retrain. We do believe that business and government can do many things to properly incent retraining, income assistance, reskilling, early retirement and relocation for those whose job might be adversely impacted by AI (I talk about some of these ideas in Section IV around work skills training and the Earned Income Tax Credit).

One last but important point: We have focused on some of the “known and predictable” and some of the “known unknown” events. But huge technological shifts like AI always have second- and third-order effects as well that can deeply impact society. Some of these are, for example, cars bringing about the development of suburbs and shopping malls; agriculture enabling cities; and the original internet (invented back in 1969) leading to mobile phones, apps and social media. We should be monitoring for this kind of transformation, too.

Private credit and credit in general. The leveraged private credit market totals $1.8 trillion. As a comparison, the U.S. high yield bond market totals $1.5 trillion, and the bank syndicated leveraged loan market totals $1.7 trillion. Taking a wider view, the total market size of investment grade bonds is $13 trillion. And the total market value of all residential mortgage securities and loans is also $13 trillion. In the great scheme of things, private credit probably does not present a systemic risk.

I do believe that when we have a credit cycle, which will happen one day, losses on all leveraged lending in general will be higher than expected, relative to the environment. This is because credit standards have been modestly weakening pretty much across the board; i.e., more aggressive and positive assumptions about future performance (called add-backs), weaker covenants, more use of PIK (payment-in-kind; not paying interest in cash but accruing it), more aggressive private ratings (particularly in insurance companies) and more arbitrage (not always a great sign). Also, by and large, private credit does not tend to have great transparency or rigorous valuation “marks” of their loans — this increases the chance that people will sell if they think the environment will get worse — even if actual realized losses barely change. Additionally, actual losses right now are already a little higher than they should be, relative to the environment. Finally, if rates or credit spreads ever go up, the companies that borrowed will have to borrow at even higher rates, putting them under even greater stress. However this plays out, it should be expected that at some point insurance regulators will insist on more rigorous ratings or markdowns, which will likely lead to demands for more capital.

It has always been true that not everyone providing credit is necessarily good at it. There are many players who are late to this game, and it should be expected that some credit providers will do a far worse job than others. We have not had a credit recession in a long time, and it seems that some people assume it will never happen.

Additionally, anything that gets sold to retail investors as opposed to institutional investors requires greater transparency, higher standards and fewer potential conflicts. If anything ever goes wrong, you should assume that retail investors, even though they were told about some of the risks, will seek remedy in the courts. Also, some of these loans go into various funds run by the asset management company. Generally, each of these funds has its own objectives and its own fiduciary responsibility to make sure that the loans are suitable for that specific fund. Those who do not do this properly are likely to get into trouble.

Private markets. With stock markets at all-time highs in recent months, it is a little surprising that private equity firms, which own close to 13,000 companies, have not taken greater advantage of healthy markets to take their companies public. Private equity investments are now held for an average of seven years — this is virtually double what it used to be. And some are sold, not to another company or taken public, and put in a new fund called a continuation fund. We have generally had nothing but a bull market since the great financial crisis — it’s hard to imagine what will happen if and when we have an extended bear market.

Source: JPMorganChase