Decoding J.P. Morgan & BlackRock Earnings for Interviews

Welcome back to The Deal Room. Fresh week ahead, and we've got a really interesting episode actually, because in this discussion I get a lot of questions about how do I interpret corporate earnings to the benefit of you in the interview process. Even if you're an investor, how do you get to understand these financial statements in a bit more detail? So what we're going to do is we're going to unpack two major financial institutions, One being a bulge bracket bank, JP Morgan, the other, the world's largest asset manager, BlackRock. And we've had a whole host of these come out last week, Morgan Stanley, Goldman Sachs, Citi, everyone. And so how can you use this to your benefit and deconstruct it and articulate it, break down some of the jargon in a way that's going to be incredibly useful for you if you're going through the interview stages. So yeah, Stephen, looking forward to this one.

Yeah, thank you so much, Anne. Yeah, me too. This is really interesting and I think hopefully we're going to take a couple of companies. Well, we're going to take a bank and an asset manager who's released their Q3 financials quite recently, and I'm going to go through my process for going from the headline down into the detail. And again, we've used the analogy of the layers of an onion, peeling layer after layer to get down to those insights that if you are sitting across a across the table from an interviewer, that's going to make you really, really stand out because you haven't just read the headline, you haven't just read the high-level numbers, you've actually started to think about, all right, so what is the CEO actually saying? So we're going to take, uh, we're going to start with JPMorgan. Why not? Biggest bank in the world. And then we're going to go on and talk about BlackRock because biggest asset manager in the world. So there's some, there's going to be some really interesting things and quite a lot of, uh, quite a lot of numbers. We'll break down a little bit of jargon, but also a little bit of qualitative stuff, strategy and messaging as well. So, yeah, looking forward to it.

Yeah. And I know when you read about these earnings reports in the FT or the Journal, probably the first thing that you see is earnings per share and revenue. And that's kind of the main things that the article will lean into. But I know when you look at a financial statement, it's almost like we're looking at two polar ends of the spectrum. You get the full financial statement, which is packed with information and you've got the FT kind of just talking quite superficially at the top. So maybe we could start there. So what are the key numbers and how do you interpret them?

Yeah, this is, it's a really good, it's a really good place to start. And, and JP Morgan, let's just, let's just remind ourselves that JP Morgan is a bank. And I'm using this example because a lot of you will be doing bank interviews and the key numbers for banks are slightly different from the key numbers for almost every other type of company. And we've done podcasts in the past going through why banks and the financial institutions group is a little bit different from a different sector team. But the headline for JP Morgan: JP Morgan shares pop 5% after topping estimates on better-than-expected interest income. Now, if you're new to finance, you're just thinking, where do I even start with this statement? It sounds good, because their shares have popped 5%. But let's think about this. Why have they popped 5%? Firstly, they've topped estimates. So as you know, Ants, in the run-up to an earnings release, remember these can be quarterly, Q1, Q2, Q3, and then annual, the 10-K at the end of the year, at the end of their reporting year. Analysts get really excited, research analysts get really excited predicting the key revenue and the key earnings per share metrics that really drive share price performance. The most important is, as we've said, earnings per share. So the amount of earnings generated per share, it's pretty simple, profitability per share. And in JP Morgan's case, on the 11th of October, they released earnings per share of $4.37. Now the Street, Analysts spent all of their time and worked on all of their models and thought that JP Morgan— the consensus was that JP Morgan would be generating $4.01 of earnings per share. So this is a massive beat. This is a significant earnings beat. And what's more, analyst consensus was that revenue was going to be $41.6 billion. Sort of a massive number for a quarterly, quarterly, quarterly event. but actually revenue came out at $43.32 billion. So it was an earnings beat and it was a revenue beat. Now the second part of that headline is more bank specific. So topping estimates on better than expected interest income. Now remember, banks have two different sources of revenue. They have their advisory and origination and investment banking and asset asset management and credit card revenue, whatever it might be that's not kind of core bank revenue. And then they have this thing called net interest income. And that is the revenue that you generate from the spread between the amount that you, uh, the, the rate for savers and the rate for deposits and the rate that you charge out for loans. And JP Morgan has absolutely smashed it with $23.5 billion of net interest income in the last quarter. The estimate was $22.7 billion. Just as a bit of an aside, when I'm looking at analysing the performance of a particular company on a quarterly basis, most of the time when I'm trying to compare, I'd rather look year on year than quarter on quarter. Just as a bit of, yeah, just as a bit of advice for young analysts, because quarters, especially in things like banks and seasonal businesses, quarters have their own different dynamics, their own different ways, own different revenue profiles. So I want to look at year-on-year growth from a quarterly perspective relative most of the time to quarter-on-quarter. So those are the high-level numbers. Should we go a little bit deeper?

Just a quick question then. So net interest income, I'm assuming that that's applicable for JP because of the nature of its business, and that could translate to say a Citi or a HSBC. But what about a Goldman Sachs who doesn't have— whose core businesses are a slightly different composition?

Yeah. So the net interest income will apply to any company that takes deposits or any bank, key being, keyword being bank, any bank that takes deposits and lends money. Now Goldman Sachs isn't a traditional bank. I don't know if it has net investment income. It derives the majority of its revenue from its investment bank. Remember, if you're thinking about markets, you're thinking about fees. And if you're thinking about the investment bank, you're thinking about origination fees, transaction fees, M&A fees, and things like that. So that's where Goldman Sachs really makes its in the majority of its revenue. Any other high street bank, any other bank will have this net interest income as the top line of its income statement.

Okay, so there's plenty of other here just to complicate the mix. ROE, ROTCE, CET1. So these all might be very familiar to some people, but I'm guessing the large majority would have no idea what any of that stands for.

Yeah, this is, this is really interesting because I actually looked at, um, JP Morgan's, uh, quarterly results or earnings release, its kind of press statements from pre-2010, just to have a look at what they wanted to signify as the key metrics back in 2009, 2008, and before the financial crisis. Before the financial crisis, Return on equity. Again, as you would expect, it is the amount of money that you make, your net income divided by your average equity outstanding. That is still a metric. That's a metric that banks use. And in JPMorgan's sense, it's 16% return on income, uh, return on equity, which is pretty impressive. Return on tangible common equity. ROTC, these are the two highlighted items in the press release. That's 19%. That strips out any intangible equity. So things like goodwill, other intangible assets, intellectual property, and things like that. But one set of numbers that was previously not on JP Morgan's front page of its quarterly press release, but now certainly is. Are things like core equity tier 1 capital ratios. Now, as anyone that would have followed the financial crisis knows, before 2008, we didn't really look at the too big to fail banks and their exposure in an environment, in a kind of black swan edge case, big loan losses environment. We just assumed that big banks had their own measures in place and everything would be okay. Post-Lehman, post-financial crisis, we have had the Basel I, II, and now Basel III, actually soon to be Basel IV, Basel III Accords, which mandate that every major bank, and major banks are the bank, you know, globally significant banks, everyone that you would know, they need to have a minimum Tier 1 capital as a percentage of their risk-weighted assets. Now it all gets a little bit complicated, but risk-weighted assets are effectively your loans, right? And your core equity Tier 1 capital is money that you can offset against losses on those loans. So a core equity tier 1 capital ratio of 15.3% means that out of a total loan book or a total risk-weighted, risk-adjusted loan book of 100%, JP Morgan's got 15% in the background. And that actually equates to another headline item on JP Morgan's financial statements, total loss absorbing capacity, which again is now something that's regulated. They've got a total loss absorbing capacity of $544 billion. All this to say, and maybe we'll go on to Jamie Dimon's perspective on regulation in a few minutes' time. All this to say that at the very, very top of these press releases, yes, you've got the performance of the bank, earnings per share, revenue, return on equity, but we are also— these big banks are so well insulated against losses through core equity tier 1 capital ratios, loss absorbing capacity, a really strong analysis of risk-weighted assets such that, you know, even if a pretty decent size black swan event did come along, all of the modeling from Basel III suggests that, you know, a CET1 ratio of over, over 6% will probably be fine, let alone 15%. Really good again, if you're going into an interview to start to understand the environment and the landscape post-financial crisis that banks operate within.

Yeah. And I think an add-on to that is for awareness that there are regular and frequent stress tests that happen of the biggest financial institutions, which forms a key part of the role of the central bank, the Federal Reserve, who will also be then, will allow banks to understand where they sit within some of these measures and also whether or not they're entitled to move the goalposts a little bit and then perhaps release some capital to give back to shareholders in dividends and things like that.

Yeah, it's really interesting. And that's where you kind of, you know, so I started with the headline, I've gone into the earnings press release. And just looked at that first page and looked at some of the numbers. The next thing I want to do is actually go into the financials of the 10-Q to see what constituted this blowout quarter. And as you say, and what the dividend policy of the bank is and whether that's more or less than it was in previous quarters. So I'm going to dive into the 10-Q, into the quarterly financials, and I'm just going to highlight investment bank and market-specific revenue items. So if I'm in an interview and the interviewer goes, give me a bit of an overview of, of JP Morgan, you know, where are we firing on all cylinders? What's really exciting you? Well, I'm going to tell you that investment bank fees were up 31% in the last quarter to $2.27 billion above a $2 billion Street estimate. Its fixed income trading is at $4.5 billion worth of revenue. Its equity trading is up 27%. So these are quite some quite staggering numbers. And remember, we talk about, when we talk about Nvidia, we talk about growth off a very, very significant revenue base. When you're growing double digits off a multi-billion dollar revenue base, this is really, really quite impressive. So diving down into those different levels of performance and knowing, knowing that the IBD revenue and the markets revenue are going absolutely great guns. The next thing I'd do before I get onto the earnings transcript is I would look at the league tables just so that I've got, you know, I want to put this in context. I want to see where JP Morgan is. You know, this sounds really good, but it's always good to see how they're performing relative to their peers. A bank like JP Morgan is absolutely flying. So overall investment banking, you know, with the deal room, we talk, we talk about IBD overall. They are number 1 year to date with $6.5 billion of fees outstripping Goldman Sachs. Goldman Sachs, $4.9 billion of fees. So they're absolutely tearing away in the lead. They're 2nd overall in M&A, 2nd to Goldman Sachs. They're 1st in equity capital markets. They're 1st in loan origination and they're 1st in debt capital markets. So if someone says, why do you want to work for JP Morgan? You've already got, you've already got a decent amount of pretty compelling evidence that this bank whose share price has risen 50% this year and its market cap is now $630 billion. You know, this is, this is, this is the runaway train and a bank that's just been so well managed over the last 15 to 20 years.

Yeah. Talking about well managed. I know there's been some talk about the future of Jamie Dimon, but before we maybe get to that and how does an analyst approach that as a question for the future, I know that he's a guy that likes the limelight. He is part of the brand that you're buying when you look at someone like JP Morgan. And I know that there's conference calls that come with these earnings when they're released. So what's Dimon got to say and what of his Q&A with analysts is it that you're looking for?

Yeah, I would always recommend spending a little bit of time going into the earnings transcript. This is where the CFO and the CEO get on a call with research analysts and they spend a few minutes— the CFO will spend a few minutes outlining the high-level numbers that are adjunct to the press release so all of the analysts know the numbers, and then they spend about 30 to 40 minutes fielding questions. And a lot of those questions are relatively technical from a— because analysts are trying to update their projections, they're trying to update their models. So they're trying to understand what these new financials mean in the wider scheme of, of, of the business going forward or of the bank going forward. But what I find really interesting is more of the strategic stuff. So I'm just going to pick out a few things that really interests me about this earnings release. And by the way, Jamie Dimon, he's probably done 80 or 90 of these earnings releases now, right? 4 quarters. I don't know how long he's been CEO for, but quite a long time. So he has got to that stage that he's willing to be relatively short, a bit snappy, both with analysts that he doesn't think the questions are worth their time. But also there was a great opportunity, there was a great moment if you read the transcript where he has a go at the CFO of JP Morgan and says, look, I'm really bored of all this speculation about net interest income guidance. I don't want to waste the whole of my call on this particular question. Why don't you just put it out in a note so that all analysts already know? I don't need this, Mr. CFO. I want to talk about other stuff, which is absolutely brilliant. But anyway, so he's talked— so there's a couple of things that he mentions. Firstly, you know, when Jamie Dimon speaks, regulators do listen. And he said, he spoke about the need to review bank regulation. So bank regulations, which were put in place for good reason, they need to be reviewed to understand their impact on economic growth. And then we await our regulators' new rules and the Basel III endgame. So this is a not so subtle way of saying, look guys, like we have been totally, you know, our hands have been so tied from a risk perspective due to Basel III. Let's actually start thinking, all right, what is the impact here on economic growth in the country? One of the great representations of that is the boom in private credit that is taking the void left by banks that can't lend to more risky more risky companies. And there was a lot of stuff in the Q&A about that as well. The second thing he talks about quite a lot is the global economic situation and the global political situation, talking about extremely turbulent times, the obviously geopolitical conflict, but also a rate tightening cycle. Is not conducive to particularly big net interest income growth for banks. So when there's rate hiking cycle, that spread can be nice and big because it takes a while to adjust. And then when it tightens, it almost works on the inverse. And so when there are rate cuts, banks tend to struggle a bit. So there's a lot of discussion around that. And just to your final point, uh, 'Let's see if I can scroll down to my notes on whether Jamie Dimon is going to stand for office.' So, he always says, so Mike Mayo, an analyst at Wells Fargo, he says, 'I've seen your comment on the government. You did an op-ed in the Washington Post, post-Davos, blah, blah, blah. You know, it could be, you know, do you think you might go into government?' And then Jamie Dimon responds, 'Look, I've always been an American patriot. I think the chances are almost nil, but I've reserved the right to go into some form of advisory or political position.' And then he backs out and then he goes, 'But no, I love what I do.' Because these different messages, these different words, and even the sentiment behind the words are going to get picked up by algorithms first and foremost that says sentiment analysis equals Jamie Dimon has a you know, a slightly increased chance of leaving due to comments relating to the government, you know, let's sell some shares or let's short those shares because Jamie Dimon's such an impressive, uh, bank leader. Everything gets analyzed with a really, really fine-tooth comb. And that's why even if I'm going into an interview for an internship, I still take a look at it. You know, some nuggets of really good insight that are going to make you stand out Well, well above someone that's just going to, you know, so why do you want to work for JP Morgan? I really like their culture of, you know, inclusiveness and, and the dynamism of their workforce. Well, that doesn't really tell me anything. Let's get a little bit deeper.

This pattern then, to summarize what you've discussed with JP Morgan, can students get this for all other banks? The analyst call, the CEO access to what they're thinking, so on.

Yeah, you can get it for all publicly listed businesses. And again, if you are going down the investment analyst route, so you're either thinking about working on the buy side or you're thinking about doing equity research or whatever it might be, this is what you do all day. You are going, you start with the high level and then you try and understand the why, why the high level is what it is and what counterfactuals exist and how you might be able to disprove or come to a slightly contrarian view through the this deep level of analysis. And I've mentioned it once, but, you know, this has always been a very human job. And it's still a human job. But the power of, you know, sentiment analysis was around back in my day, which is algorithms, scanning earnings transcripts, and providing a sentiment score, positive, negative, from the way that the CEO and CFO are talking about their business. So there's a lot of algorithmic artificial intelligence derived products that are going to be helping us better understand the future trajectory of a company.

Okay, cool. Well, look, let's move on and talk a little bit about asset managers, and I guess there's only one you can really talk about, which is the best reference point, which is the world's largest one, which is BlackRock. And I know, well, what I'm interested to hear now, what are the similarities and what are the differences in how you would approach this? And also I know from when I look at like a presentation document as a supplement in their earnings call, there's a lot of emphasis put on the technology side on BlackRock, on their platform. Also, they've obviously been hugely active in acquiring some firms in certain spaces in the last quarter or so. So how do you kind of bind all this together?

Yeah, it's so in terms of, so BlackRock's obviously the world's largest asset manager. And the financial statements of a BlackRock mirror the financial statements of any other non-bank company. They're much closer. If you were to pattern match a BlackRock income statement with a Tesco's income statement, it would be much closer than BlackRock to a JP Morgan because they are, they have revenue and then they have costs and then they have profit much like most businesses. Now, obviously, BlackRock, the business model fundamentally is earning management fees, earning assets management fees on assets under management. So the number that we really care about when it comes to the high level of an asset manager is assets under management because assets under management drive revenue. So the headline for BlackRock. So BlackRock's Q3 earnings crush consensus as net inflows surge. So BlackRock now has assets under management of $11.5 trillion. This time last year, it had assets under management of just over $9 trillion. And there are 3 ways that you can increase your assets under management as a firm. Some are better than others. The first is that the assets that you manage become more valuable. That's not a net inflow. That's not— that's good because you're making money for your clients, but it's just, it's not that much of a data point. The second is through, you can increase assets under management through inorganic growth, i.e., acquisition. And BlackRock has finally completed The acquisition of Global Infrastructure Partners, which is adding about $115 billion of assets under management to BlackRock's total AUM pile. But then the third is this concept of net inflows. So this is new pension funds, new insurance funds, new asset owners investing more through BlackRock. So their net inflows have increased by $221 billion. So $221 billion of new assets under management have come in in the last quarter alone. And that is a remarkable number. Again, you, Global Infrastructure Partners is a big company and it manages $120 billion. BlackRock got $220 billion in net inflows in the last quarter. And Larry Fink is right to say our strategy is ambitious and our strategy is working. They've had an AUM growth of $2.4 trillion, about the size of the UK economy in the last 12 months. This is a business that has massively benefited from scale. And another thing that this business has done so extraordinarily well is acquire businesses. So you might have remembered, you know, the thing that really turned BlackRock into the company that it is today is the acquisition of Barclays ETF business, exchange traded fund business, which is now called iShares, which is basically, if you look into the financials of the business, and this is what I would do next, I'd be looking at, all right, what, how is this $11.5 trillion comprised, and about half of it is exchange-traded funds. So those passive strategies that have very, very low fees, but they also have very, very low costs. So if you go on your share trading platform, you will see the iShares S&P 500 ETF. That's, it's a very, very standard product, but it's a really, a really, it's made BlackRock what it is today, and it's just built around that ETF business and created, obviously it's got a big active business as well. It's got a big multi-asset business, big alternatives business. Now it's got a big infrastructure business because of GIP and it is firing on all cylinders. Now, obviously Larry Fink wants to talk about technology because technology is a brilliant buzzword. But if you look at its revenue split, 80% of its revenue is fees. 8% of its revenue is technology services, and that's the company's Aladdin product, which it sells to other asset managers. So yes, they're leveraging their technology, but this is a, it's almost as simple a business as you can possibly imagine. Get more assets under management, get more revenue, manage your cost base, make sure that the products that you are, the investment products that you're providing on average beat benchmark and you're off to the races. Sounds pretty simple, right?

So strategically, what, you double down with that approach or do you try to diversify the business going forward long-term? I mean, they've been on top for such a long time, it's hard to be critical of their strategy or execution, but that pie chart looks awfully heavy on base fees.

Yeah. Yeah. I mean, they've tried to diversify and it's not that it's not that Aladdin or their technology division's particularly small. I think their technology services revenue is a $400 million a quarter business. So it's not a tiny business, but it's just that everything else is so big. And BlackRock IPO'd 25 years ago last week. So it's been a public company for 25 years. And one thing that you can definitely say is that it's focused on what it's good at. And has gotten better at it and has now benefited from economies of scale so that if I'm an asset owner, if I'm a pension fund, I just go to BlackRock for everything now. You'll probably see them investing more in private markets. GIP was a big acquisition. They might buy a private credit provider. They might do some more inorganic stuff to increase AUM, but from diversified different asset classes. But beyond that, why change? There's plenty more, you know, they're $11.5 trillion and this, you know, they're reliant on the fee model. But $11.5 trillion is the biggest asset manager in the world. But there's plenty more assets out there. They're not a monopolist. They don't, you know, they don't control 50% of the market. They probably control 5% of the market. So there's still a lot of other fish in the sea. And Larry Fink, very interesting. If you read the earnings transcript, the difference in nature between Larry Fink and Jamie Dimon is there for all to see. Jamie Dimon, very kind of hard-edged banker, Wall Street, sharp-elbowed, don't waste my time kind of character. Larry Fink comes across more as a kind of patriarch, very kind, very soft, very smart, but a little bit more on the Warren Buffett side of things, maybe, than on the Jamie Dimon thing. And both of them have unbelievable reasons to be happy and to be a little bit chuffed. And it kind of shines through in Larry Fink's, but you kind of sense that Jamie Dimon just wants more and more and more and more. It's pretty relentless.

Is that a good analogy almost to use then to inform people about what side of the industry that they should target and to align with their own personal motivations and interests?

It's a really interesting question. So that asset management by its very nature trends towards being longer term and being, you know, and having those longer feedback cycles of, you know, you invest with me and you, I'll prove that it's worth that investment in a few years' time as the financials come through or the returns come through. So it is, it's always been, the buy side has always been a little bit more, not necessarily cerebral, but certainly a little bit calmer, a little bit more strategic, a little bit more long-term focused, a little bit more Larry Fink. And then if you're a Wall Street investment bank, I think as I discussed on previous episodes, you are fighting, you're in the bear pit, you're fighting tooth and nail for fees to increase your loan book. You are there scrapping, for execution, you know, for execution-related fees, for origination-related fees, and you're there in the trenches and you can't afford to let your foot off the accelerator even an inch because you've got Goldman Sachs right next door and you've got equally aggressive banks that are trying to rip market share out of you. And it's not to say that asset management's not competitive, but it does. Yeah, it's a slightly different, you know, the iBanker, stereotype is probably quite different from the buy-side active investment manager stereotype.

Okay, cool. So look, really nice piece there to finish on, and we've explained a bit more about those businesses. Definitely on the JP one, it can be applied more broadly to a lot of these other firms. A lot of the jargon words hopefully make a bit more sense now. Any questions at all? Obviously, if you listen on Spotify, there is the feature to drop a comment. So just make a question if you have one and, or leave one, and Stephen will pick them up. I will, I will nudge him accordingly as they come in. So, uh, please do. And then also share the pod. We'd love to get this out to more people. So if you did find the episode useful, uh, I'm very happy and I hope it helps for your upcoming interviews, but don't keep it to yourself. Spread the love and it'd be great to, to grow the Amplify Me audience. But thank you as ever, Stephen. Always appreciated.

Yeah, thank you, Ant.