By Shane McGinley
American banking giant JP Morgan has faced some recent record-breaking fines and headline-grabbing scandals, but Jonathan Conner, the Middle East head of its private banking division, explains why he’s not worried about losing the trust of his high net worth clients
What do you call 12 bankers at the bottom of the sea? A good start goes the popular but damning punchline. To be fair, bankers have never been overly popular and their reputation has probably hit an all-time low since the global financial crisis took hold in 2008.
In fact, it appears that business graduates are becoming more reluctant to join the profession, with a survey last year of almost 108,000 business students from 1,350 universities in Asia, the Americas, Europe, the Middle East and Africa reporting a slump in the number signing up to be the next Gordon Gekko - or Nick Leeson, if things go badly.
All of this appears to be news to Jonathan Conner, a banker for 14 years and the Middle East head of the private banking division of JP Morgan, the biggest bank in the US and one of the largest banking institutions in the world.
“I don’t know if we have a reputational problem now,” he says without a hint of hesitation, adding that he believes the strength of his bank’s relationships with merchant families in the region has meant it has remained a popular and trusted advisor since it set up in Riyadh 80 years ago.
“One of the hallmarks of the Middle East is the close personal relationships you build and the trust that evolves by being there through thick and thin. If we look back to some of the headlines JP Morgan had last year and the year before clients know this was a bump in the road, they have had a long-term relationship with JP Morgan and we would weather this and the relationship will weather this. I haven’t had any clients be overly concerned about the headlines in the papers.”
To call JP Morgan’s recent headlines ‘bumps’ is something of an understatement when you look at its recent record. The bank last year agreed to a $13bn settlement over mortgage-backed securities sold ahead of the financial crisis, in what the US Justice Department called “the largest settlement with a single entity in American history.”
Reuters claimed last year the bank had agreed to about $20bn in settlements in its drive to clear up legal claims, including everything from mortgage-related issues to derivatives and power trading.
Only days ago a US district judge said the bank’s shareholders could pursue claims that its senior officers knowingly hid the increased risks that the bank had been taking in early 2012. These were specifically related to the infamous ‘London Whale’ case which saw the bank try to cover losses of around $6.2bn in derivatives trades.
This particular case resulted in the bank being hit with a fine of nearly $1bn by four regulators on both sides of the Atlantic — the third-biggest banking fine by US regulators, and the second largest by UK regulators at the time — and two former traders facing criminal charges.
Even looking over the horizon it doesn’t seem to be getting much better and there are likely to be even more major obstacles along the road. As we went to press, the bank faced allegations by European Union antitrust regulators that it, along with HSBC and France’s Credit Agricole, rigged financial benchmarks linked to the euro. At the same time over in the US, one of the country’s oldest galvanisers accused JP Morgan, Goldman Sachs and metal warehouse operators of conspiring since 2010 to manipulate zinc prices.
While JP Morgan has said the latest charges in Europe are without merit and that it would defend these latest allegations, Reuters claimed the banks could face penalties of up to 10 percent of their global turnover if found guilty of breaching EU antitrust rules.
Despite these issues making the news, Conner says he is not worried about travelling throughout the region for face-to-face meetings with clients.
“Relationships in this part of the world are very strong and if you have been doing this for over ten years clients will stick with you through thick and thin, in the same way we stick with clients through thick and thin. I think they look back to the crises when JP Morgan never had a down quarter or a loss... Clients look to JP Morgan and hold it in a very high regard.”
While it certainly hasn’t slipped into the red, at the top level, America’s biggest bank reported that net income fell 19 percent year-on-year to $5.27bn in the first three months of this year, with the massive legal settlements and rising compliance costs eating into revenues and profits.
However, again, Conner says the situation in the Middle East private banking sector does not reflect this and he seems keen to distance JP Morgan the private bank from the negative publicity surrounding JP Morgan the global brand.
“Over the past three years, the private banking business in the Middle East has experienced average annual growth of 10 percent. It is our goal to continue on this consistent growth path over the next three to five years,” he says, while declining to give exact numbers in terms of revenue sizes or client numbers.
“Most of what we do in the Middle East is investment related,” he continues. “Clients come to us and we manage money for them on a discretionary mandate but we also have a lot of relationships that are advisory relationships where they come to us for ideas outside of this part of the world as they want to diversify their wealth and look for opportunities outside the Middle East.”
So what are his clients being advised on a day-to-day level in terms of managing their wealth? “Every client is different and most of our clients are individuals or families that tend to be the merchant families that are on the first, second or third generation of family businesses,” Conner says.
“What should be in these allocated categories is decided at a global level by the bank’s chief investment officer in New York, with input from a chief investment officer in Europe and Latin America, who together decide what asset classes should be targeted and which should be dropped. This is all part of a global chess board and involves elements such as inflation, interest rates, valuations in the equity markets and where commodity prices are.
“Depending on what their risk appetite or what they are looking for... we have a chief investment officer who drives what our strategic asset allocation is in our globally managed portfolios. Our strategic asset allocation for a balanced portfolio shows generally 40 percent in global stocks, 30 percent in global bonds and cash and 25 percent in alternative investments.
“What we do is we tactically overweight or underweight those to add value to our clients’ portfolios,” Conner explains. “For instance, we are 4 percent tactically overweight in equities right now. We like US equities and we like Asia/Japan equities, so this is an area we are tactically overweight because, from a valuation perspective, from the pickup in the global economy, equities will help participate in that.
“If you go into fixed income we don’t like government bonds right now. There is not a lot of value in government bonds where they are priced right now. Interest rates are quite low and we expect interest rates to rise over the next 18 months to two years, so what we have said to clients [is]... if we are going to be in fixed income we are going to overweight high-yield bonds as we like the credit area of the fixed income market. We don’t like government securities so we are underweight in fixed income.”
Despite Conner’s assertion that “we don’t like government bonds right now”, days after our interview it was reported that JP Morgan had agreed to buy $2bn worth of Argentinian government bonds, bringing its purchases of securities in the Latin American country to almost $5bn in the space of nearly a week.
It’s a further example of the increasing contradictions between the difference in policy between the global banking conglomerate and the closer, fuzzier feel created by the relationship building and polices pursued by the private banking division.
But back to shaping the portfolios.
“We are slightly overweight in alternatives and that underweight in fixed income we have moved to into hedge funds. We think hedge funds are going to offer a decent risk adjusted return in this environment where you are going to see pressure on interest rates over the next 24 months as the US probably starts to raise interest rates. So that is the value that we add. We have a lot of intellectual capital strategy teams helping us know where we should be allocating money,” Conner says as he concludes his investment pitch.
While Connor is insistent the bank’s relationships with its clients are solid, surely it must have had to drop some clients in order to comply with the tighter regulations in relation to compliance? Last year, HSBC announced it was to close the accounts of some customers in the Middle East and North Africa with links to sanction-targeted nations such as Iran and Syria after it was fined $1.9bn in December 2012 — at the time the largest such punishment ever imposed on a bank — after a scathing report by US lawmakers accused it of lax compliance controls.
Even Coutts, the 320-year-old private bank which counts Queen Elizabeth II among its clients, admitted it had dropped a handful of Gulf customers as part of a review of its client list following a $14m fine by UK authorities for failings in its anti-money laundering controls.
“I can’t comment on HSBC... I am not sure what types of clients they have exited but our business is mainly focused on the ultra high net worth families and families we have gotten to know over the years so it is getting to know how they created their wealth and how they have expanded their wealth over the last ten, 20 or 30 years,” he says, confirming categorically that it has not had to drop any Gulf clients over concerns over their business dealings or the source of their wealth.
“No, I have been doing this for 14 years and the core of our business is in the GCC. We have a very good understanding of who the families are that we want to deal with. We have a small team and we are unique, I would say, versus a lot of our competitors. Most of our bankers only carry about 25 to 30 clients and a lot of the bankers have been in private banking for over ten years, so we know our clients quite well and we generally don’t have a lot of surprises in not knowing our clients or how they created their wealth.”
Relationships aside, you wonder how Conner can be so confident and what checks they have in place other than “getting to know them personally”. When pushed, he says: “We comply with all of those [regulations]... It is a changing landscape, the whole industry is getting more regulation but I would say one of the hallmarks of JP Morgan is that we know our clients very well.”
As we wrap up our discussion, the no-comment response inevitably becomes into play when some of the specific scandals, such as the ‘London Whale’ scandal in the UK or the epic US mortgage fines are raised. Even when reports that its retail division in the UAE this year decided to cut its correspondent banking relationship with Emirates NBD, Dubai’s largest bank, are raised Conner declines to comment.
While sources claim the move was a bid to scale back its relationships with foreign banks in order to comply with regulatory pressure to tighten risk controls, JP Morgan’s corporate communications people issued us with this ambiguous response: “We’ve been undergoing a comprehensive review of our business to ensure we meet our responsibilities as a leading global business and provide the best service to our clients.”
Service, relationships and trust are words JP Morgan executives use a lot, but they must ring true at some level if Conner is to believed that the close relationships his team enjoys with local clients have managed to weather the scandals that have hit the brand at a global level. Even as we finished up writing this article negative headlines continued to dog America’s biggest investment bank.
In Asia, its former head of investment banking in China has been arrested by Hong Kong’s anti-corruption agency and in Australia local newspapers report that a technical support employee who worked for the bank claims it regularly misled its New York parent and the US Federal Reserve by failing to report losing trades.
Even closer to home in the Gulf, a senior JP Morgan executive was last month fined $20,000 and banned from being employed by any company operating in the Qatar Financial Centre (QFC) over acts of “serious misconduct” and “failing to act with integrity in his position and acting with dishonesty”.
Again, Conner moves to distance the private banking division from such headlines and repeats his rhetoric that clients in the region are not even remotely concerned by such media reports: “We were in the press a lot but not enough that our clients got concerned about JP Morgan and it goes back to that long tradition of being here in good times and bad.
“JP Morgan doesn’t have many bad times and we showed our stripes during the financial crisis when a lot of banks were exiting businesses and having their chairman and CEO changed every four months and selling units they didn’t want to be in. I don’t have any worrisome calls from clients right now.”
With regional business growing 10 percent per annum and not a single client dropped or lost, while global revenues decline and fines increase, the Middle East private banking sector may yet be JP Morgan’s shining hope, for both its balance sheet and its reputation. Coming up with better punchlines to banker jokes might be a harder task.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.