Question

Bank of America and JPMorgan Chase are major competitors to Wells Fargo. Please (1)analyze their strategies, (2)core competencies, and (3)competitive response for both Bank of America and JPMorgan Chase.

Answer 1

At its current level of profitability, Bank of America’s shares should be trading higher, Shanahan argues. When discussing longer-term prospects, he said: "They are kind of catching up, but within a couple of years they should reach a level of profitability similar to J.P. Morgan Chase JPM+8.99% ”

J.P. Morgan Chase has a reputation as the “best in class” among the Big Four U.S. banks, but Bank of America might be a better investment if you hold the stock for the next few years, according to Edward Jones analyst James Shanahan.

In an interview Oct. 17, Shanahan pointed to Bank of America’s BAC+8.68%  record $7.6 billion in share buybacks in the third quarter and massive investment in technology as catalysts for improving earnings performance and growing market share. (Buybacks lower the share count to boost earnings per share. They also reduce a bank’s excess capital, which boosts returns on equity.)

• Earnings calls – While JPM has seen strong digital banking growth, Bank of America, Barclays, and Morgan Stanley each mentioned technology or digitization on earnings calls at least twice as often as JPM had between 2008 and 2017. While JPM talked about expanding its digital consumer banking capabilities, others discussed how digital might change the workforce or upcoming digital-focused products.
• Investment activity – JPMorgan has prioritized payments, infrastructure, and cybersecurity as recent areas of interest in its strategic fintech investing, according to an analysis of CB Insights data. However, the bank trails Goldman and Citi by deal count. It has focused on companies it previously partnered with or already worked with including LevelUp, Bill.comand Menlo Security. JPMorgan’s two more active bulge bracket peers have invested in a broader array of companies including startups focused on mortgage, regulation technology, and fraud prevention.
• M&A activity – Tech M&A has not been a focus for many of the bulge bracket banks to date. JPM is one of just three bulge bracket banks to pursue tech M&A along with Goldman and Credit Suisse. While JPM’s recent push into tech M&A also highlights a focus on payments tech (it reportedly acquired WePay for up to $400M), Goldman has shown a focus on lending/credit.
• Patents – Bank of America is the most active patent filer of the bulge bracket banks, with close to 5X more patent applications filed since 2009 than JPM, the second-most active by patent application activity.

Bankers have been arguing for a level playing field for decades. Their first major target was thrifts with deposit rate and other advantages — yet they are no longer a concern as the strong thrifts became banks and the weak ones became history.

Then there was concern about major retailers like Sears getting into banking (“We have nothing to fear but Sears itself!”), but many such retailers have largely since shed their financial businesses, and some have even declared bankruptcy. Walmart, also desirous of getting into banking at one point, backed off, and is now busy defending its turf against Amazon. Bankers have complained to congressional deaf ears for decades about the several competitive advantages of credit unions. Most recently, bankers have expressed concern about less-regulated fintechs.

But I would argue that the latest threat to banks is not from these past or current nonbank barbarians at the banking gate, it’s actually from one of their own: JPMorgan Chase.

These other mammoth competitors, namely money center and super-regional and regional banks, will most likely feel the brunt of Chase’s expansion. For example, Bank of America is the retail market share leader in both the Boston and D.C. markets, and Wells Fargo is the second and third leading retail bank in the Philadelphia and D.C. markets, respectively. Putting aside Wells Fargo’s well-publicized recent reputational problems, both of those banks have been closing branches in recent years, and many of their retail and business customers wanting to deal with very large banks with massive branch networks will prefer the new Chase alternative.

Community banks must be able to make the case for why customers should stick with them when JPMorgan comes to town. The Independent Community Bankers of America put it best several decades ago: “Why give a community a branch when you can give it the whole tree including the roots?” Chase will be opening 400 branches in new markets but not one of them will be a locally rooted community bank tree.