If anybody on Wall Street is due a victory lap, it’s Daniel Pinto.
The head of JPMorgan Chase‘s massive corporate and investment bank is fresh off a year for the record books: Pinto’s business produced $49.3 billion in revenue and $17.1 billion in profit in 2020, more earnings than JPMorgan’s three other divisions combined.
But Pinto, who is one of two key deputies of CEO Jamie Dimon as co-president of the biggest U.S. bank by assets, gave no signs of complacency during a recent Zoom conversation.
Instead, he was unusually candid about the risks that JPMorgan faces from competitors everywhere, from traditional bank rivals to tech giants and fast-moving fintech players including PayPal and Square. The two companies have surged in valuation during the coronavirus pandemic as users increasingly lean on their payments systems and digital wallets.
Pinto’s approach is in line with what has been a tumultuous, impossible-to-predict period. In March last year, Pinto and his co-president Gordon Smith had to assume more responsibilities running JPMorgan as Dimon recovered from emergency heart surgery.
Soon after, the pandemic forced Pinto’s traders and bankers to work from home for the first time, an untested model for Wall Street. Despite that, they capitalized on the massive actions that the Federal Reserve and lawmakers took last year to steady the U.S. economy. Now, members of Congress are working on President Joe Biden’s plans for another $1.9 trillion in pandemic relief.
Here are excerpts from our conversation.
CNBC: Let’s start with the markets. Several U.S. stock indexes are at all-time records. What do you think is driving stocks right now, and what could threaten the rally?
Pinto: When you have such an extreme infusion of liquidity and fiscal stimulus globally in any market, you’re going to create a situation where, with rates at zero, capital is looking for investments and you’re going to have some overvaluations in certain assets. It’s not just about the growth stocks that did very well through Covid, but also value has broken out. Now there are, with very few exceptions, no sectors that are cheap.
I think the market will gradually grind up during the year. I don’t see a correction anytime soon, unless the situation changes dramatically.
The two risk factors for me are related to Covid. For example, a variant that is not covered by the vaccine. Markets are pricing in a weak economy in the first quarter, and then from the second quarter, helped by stimulus, the economy will do very well and probably you’ll see about 5% growth in the U.S for 2021. If something derails that, like a complication of the development of the disease, in the short term it will be a bad outcome.
In the more medium term, the risk is inflation. At the moment inflation is very controlled, but you never know how this experiment will turn out. So you may encounter inflation at some point.
Short of that, we could have mini corrections, but I don’t think that it will be a change in the trend.
CNBC: Last year, we saw the rise of SPACs, or special purpose acquisition companies, as a legitimate alternative to the traditional IPO path. SPACs helped raise $64 billion in capital, nearly as much as IPOs. What explains that?
Pinto: It’s a reflection of the market: There’s a huge amount of liquidity and not enough assets to buy. SPACs are not new. They’ve been around for 10-plus years.
So, why the increase in the number of SPACs? It’s a lot of capital looking to find a place to be invested. The SPAC is no more than another avenue for that.
What are the risks? One risk is client selection and just making sure SPACs are properly structured and have credible sponsors. A second risk is simply if a SPAC buys the wrong company at the wrong price. At the end of the day, if the transaction doesn’t materialize, everyone gets their money back and that’s it. The last time I checked there was close to a hundred million dollars of money waiting to be invested to find a target. They have two years to do it.
CNBC: Last month, Jamie said that JPMorgan executives should “be scared s—less” about the threat from fintech players. Notably, PayPal and Square have gained ground and are now worth about $330 billion and $117 billion respectively. What did the traditional banking industry miss there? Was the threat not taken seriously enough?
Pinto: [Fintech players] are very good at creating a great client experience. They are very good at delivering product fast. They are very good at creating an image that is cool.
Is there any reason why we cannot compete? Of course not. Are we going to compete? Yes. Do we have a chance to catch up? Yes.
I think that the worst thing that you could do for a company is to be dismissive about competition, and then when you realize that you were wrong, it’s way too late.
What I tell my team is, let’s work on the assumption that competitors are going to be extremely successful, not that they’re going to fail. Now tell me, what are we going to do to compete?
CNBC: When we last spoke in August, you told me one lasting impact of the pandemic would be that JPMorgan would adopt a hybrid model where your employees would rotate between working from offices and working from their homes. Is that still the plan?
Pinto: Obviously [the return to offices] has been pushed out a bit because of the massive second wave. But when you think about it, there is only one possible outcome, in my view. Going back to the office with 100% of the people 100% of the time, I think there is zero chance of that. As for everyone working from home all the time, there is also zero chance of that.
The rotational model is the only thing that really makes sense… and it can’t be prescribed from the top because if you think about a company the size of JPMorgan, there are so many functions that our 260,000 people perform, they’re all relatively different. We’ll have to cater to the needs of particular functions, but it’s not like everyone will just do what they want. It has to be somewhat structured and well-thought through.
CNBC: What do you think the impact will be on commercial real estate?
Pinto: If you are going to move to a rotational model, you will have to change the structure of the buildings and incorporate more flexible seating. A move to flexible seating alone probably reduces the amount of space by 20%. Then if on top of that you go to a rotational model, you can reduce it even more.
Buildings would run a lot more efficiently and with less empty seats. And we will have less need for recovery sites, because if everyone is constantly testing their technology at home and you know it works, why do you want an empty building with a bunch of computers in it?
CNBC: Succession planning has to be top-of-mind for your board. I don’t think it was known at first just how close your boss was to a fatal heart condition when he had that emergency surgery in March. What did you learn from that experience, stepping in the way you and your co-president had to?
Pinto: The unfortunate situation that we went through in March and April, it proved to everyone that the company has plans in place. We knew exactly what to do, and we did it during a really complicated couple of months. We’ve also expanded the operating committee to provide more leaders with visibility and exposure to strategic decisions.
I see [Jamie] every day, he doesn’t look like someone that is about to retire anytime soon.