Ever wondered how banks make money? Okay, at least have you ever surprised how the world’s most valuable bank, JPMorgan makes money?
JPMorgan, an American investment bank and financial services holding company that operates across globally is the largest bank in the US. It is reported as the most valuable bank in the world by market capitalization. Most importantly is into everything that is involved in the financial sector such as consumer banking, commercial banking, investment banking, and asset management for individuals, institutions, corporations and governments. In fact, this is why JPMorgan is said to be a bulge bracket bank.
JPMorgan provides financial services to consumers, small businesses, large corporations, governments and other clients. However, the Corporate & Investment Bank segment is the largest source of net income for the company and is growing fast.
Okay, enough said! Let us quickly delve into how this world’s popular investment bank makes money. Let’s get into understanding its business model. So, shall we?
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JPMorgan Business Model
As said, JPMorgan is a global leader in financial services and provides several services to both consumers and commercial firms. Thus the company performs a multitude of activities which are organized into four key segments.
1. Consumer & Community Banking (CCB)
2. Corporate & Investment Bank (CIB)
3. Asset & Wealth Management (AWM)
4. Commercial Banking (CB)
These four segments are its business segments, they describe the business model of the company. So, let’s quickly jump into that.
Consumer & Community Banking (CCB)
The Consumer & Community Banking segment of JPMorgan includes serving consumers and businesses with investment products, deposit, payment solutions, cash management, loans, credit card issuing, mortgage origination and servicing.
This segment posted $3.9 billion of net income in Q3 2020. The company posted $12.8 billion in revenue for the segment which was dropped by 8.6% compared to the Q3 held in the last year.
Corporate & Investment Bank (CIB)
JPMorgan’s Corporate and Investment Banking (CIB) provides market-making, investment banking, prime brokerage, treasury, securities products, services to financial institutions, governments along with investors and corporations.
Simply, CIB is further divided into two subsegments.
1. Banking
There are numerous activities in the banking segment. Investment banking, lending, treasury services in all capital markets come under this. It also includes transaction services, cash management and liquidity solutions.
2. Markets & Investor Services
This includes equity markets, security services, fixed income markets, etc.
The net income for this Corporate & Investment Bank segment is $4.3 billion in Q3 2020 and accounts for over 42% of the company’s total net income.
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Asset & Wealth Management (AWM)
JPMorgan has over $2.6 trillion of assets under asset & wealth management and it provides services for all asset classes. It also offers retirement products & services, brokerage and banking.
The segment consists of two subsegments.
1. Global Investment Management: It provides global investment services such as asset management, asset-liability management, pension analytics etc.
2. Global Wealth Management: It offers wealth management and investment advice such as capital markets, investment and risk management, banking, lending, tax planning and others.
The company makes about 9% of the total net income from the Asset & Wealth Management segment. It posted $877 million of net income in Q3 2020 which rose nearly 31%.
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Commercial Banking (CB)
This segment offers corporations, financial institutions, municipalities investment banking and asset management products.
The segment is divided into four segments namely, Corporate Client Banking, Middle Market Banking, Commercial Term Lending, and Real Estate Banking.
The Commercial Banking segment posted $1.1 billion net income in Q3 2020 and the revenue for CB rose 0.5% to $2.3 billion.
Corporate
This segment comprises measuring, monitoring, reporting and managing the bank treasure, liquidity, foreign exchange risks and other crucial financial functions of the company.
All its activities are organized in two subsegments; Treasury and Chief Investment Office (CIO), Other Corporate units. Let’s see what functions come under these two segments.
Treasury & Chief Investment Office: This includes measuring, monitoring, reporting and managing funds, interest rate, and all other company’s liquidity.
Other Corporate Units: Real estate, enterprise technology, finance, legal, compliance, risk management, internal audit, corporate responsibility etc., come under this segment.
The corporate segment reported a loss of $699 in the net income in Q3 2020.
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How JPMorgan Makes Money?
As you can see there are multiple segments in JPMorgans’ functions that offer services to its different customer segments. The different customer segments range from individuals (with average to high net worth) to wholesale businesses (Institutional investors, business banking, middle market to multinationals worth more than $2B revenue).
Additionally, this biggest bank offers its services to nonprofits, communities, municipal entities and government.
JPMorgan posted a net income of $9.4 billion on revenue of $29.1 billion in Q3 2020, which ended September 30, 2020. In the same Q3 2020, it posted total non-GAAP revenue of $29.9 billion, nearly $0.8 billion more than GAAP revenue.
Though it is clear that the JPMorgan business model brings various ways for the company to make money, let us see how exactly it makes money.
Fees & commissions
JPMorgan charges certain fees and commissions for investment management, brokerage services, insurance etc. It also makes money from credit and debit card processing, deposits and lending and mortgage fees.
Investment banking fees
This includes advisory fees, equity and debt underwriting.
Net interest income
The revenue generated from loans or other interest-earning assets after deducting the interest expenses and other related expenses is the net interest income.
Principal transactions
The gains and losses in client-driven and market-making activities. It also includes all gains and losses related to risk management and hedge accounting activities.
Key Takeaway: JP Morgan makes a major part of its revenue from Consumer & Community Banking (CCB).
Let us see the net income of the company reported from each category in Q3 2020.
Net interest income – $13.1 billion
Consumer & Community Banking – $3,873 million
Corporate & Investment Bank – $4,0304 million
Commercial Banking – $1,088 million
Asset & Wealth Management – $877 million
Corporate – $699 (loss)
Bottom Line
As you have made it to the end, hope you have understood how the banking sector’s monster, JPMorgan operates and makes money. Several revenue streams make the company profitable. Despite its brilliant business model and its slight increase in revenue (its net income rose 4%) in Q3 2020, it has seen some losses due to the Covid-19 pandemic. However, the company expects a net interest income of $55 billion in the FY2020 which would make it successful in profits again.
