Jamie Dimon was right. Speaking at a televised session during the World Economic Forum in Davos last year, the JPMorgan Chase chief executive officer predicted that the condemnation of bankers was far from over.
This year, Dimon returns to the Swiss Alpine resort with no public appearances scheduled as head of a bank that agreed to pay more than $23 billion in the past 12 months in fines and settlements. He’ll be joined by the leaders of other Western lenders that have been beset by record legal costs, fresh allegations of wrongdoing and lower profits.
Trust is on the agenda in Davos, along with market safety, as financiers gather after a bruising year of punishment and tougher regulation designed to avert another blowup. Those have eaten into profits and promise more pain. Anshu Jain, co-CEO of Deutsche Bank, Germany’s biggest lender, will talk about rebuilding Europe’s banks, a project whose success rests on greater scrutiny by the region’s new supervisor.
“Some banks are too weakly capitalized and potentially insolvent, and the system remains dysfunctional and continues to be reckless,” said Anat Admati, a Stanford University finance professor and author of The Bankers’ New Clothes: What’s Wrong with Banking who’s moderating the safety panel.
A year ago, Dimon, 57, took center stage at an hour-long debate, defending banks from blame for the financial crisis and arguing that regulators were “trying to do too much, too fast.” Since then, JPMorgan has settled claims involving mortgage-bond sales, lax oversight and turning a blind eye to Bernard Madoff’s Ponzi scheme. Legal costs led to the company’s first quarterly loss under Dimon last year and helped drive down net income 16 percent.
Investigations and lawsuits may preoccupy the biggest Western banks for years as they face inquiries into suspected manipulation of interest rates and currency benchmarks. At least a dozen firms have been contacted by authorities in the U.K., the U.S. and Switzerland who are probing allegations that traders at banks manipulated spot foreign-exchange rates for at least a decade, affecting the value of funds and derivatives.
Jain, 51, is returning to Davos two days after the Frankfurt-based bank posted a fourth-quarter loss, hurt by legal costs and restructuring charges. Jain said in a statement the bank is “confident” of meeting its targets for 2015 and told analysts this year will be a turning point as the lender puts the impact of new rules behind it.
The lender is conducting an internal review of whether members of the management board played a role in attempts to rig benchmark interest rates. In December, Deutsche Bank paid 725 million euros ($983 million) to settle claims about manipulation of the London interbank offered rate, or Libor, in the single biggest European Union antitrust penalty.
The six biggest U.S. banks set aside more for legal costs in 2013 than any year since at least 2008, and in Europe, the 11 lenders with the highest legal costs over the past two years racked up at least $10.8 billion in regulatory fines and settlements last year, according to data compiled by Bloomberg. That’s 61 percent more than in 2012.
“Politicians remain to be convinced that bankers have done enough to clean up their act,” said Howard Davies, a board member of New York-based Morgan Stanley, the sixth-biggest U.S. bank by assets, and a former deputy governor of the Bank of England. “Bankers declared war was over far too soon.”
Davies will moderate a Friday session titled “Rebuilding Trust in Finance” that features Credit Suisse Group Chairman Urs Rohner and Guillermo Ortiz, chairman of Grupo Financiero Banorte, Mexico’s third-largest bank.
“Banks have to think back to basics,” Ortiz said in an interview. “They have to make money by servicing clients and not by betting among themselves in markets that have no relation to the economy.”
Banks and financial services are the least trusted of all industries, according to an annual global survey by public relations firm Edelman released Jan. 20. Fifty-one percent of those polled said they could trust banks to do what’s right, almost unchanged from last year’s 50 percent, compared with 79 percent for technology companies. The figure for banks was 32 percent in the U.K. and 33 percent in Germany.
“The best rules won’t guarantee that banks are well-led, that banks do what makes them look acceptable to society,” Deutsche Bank co-CEO Juergen Fitschen said at a client reception in Berlin on Jan. 15. “These rules have to be accompanied by changes in our institutions.”
Fitschen, who’s also going to Davos, Jain, Dimon and Rohner declined to comment for this article through their spokesmen.
There are no Western bankers among the co-chairs of this year’s annual meeting. The slot held previously by UBS Chairman Axel Weber, Dimon and Standard Chartered CEO Peter Sands is being filled by Jiang Jianqing, chairman of Industrial & Commercial Bank of China. Jiang, 60, is the first Chinese banker to be a co-chairman of the annual meeting.
The World Economic Forum leadership role held by ICBC, the world’s most profitable bank, reflects the increasing influence of China’s state-controlled banks, which have added more assets since the 2008 crisis than are in the U.S. banking system.
The contrast with European banks, which cut about 3.5 trillion euros of assets and may shrink by an additional 2.6 trillion euros, according to estimates by Royal Bank of Scotland Group analyst Alberto Gallo, is striking.
The European Central Bank is conducting a three-stage review of banks to identify capital deficiencies in their statements of assets, debts and owners’ investment, known as the balance sheet, before assuming oversight in November of about 130 lenders in the 18 countries that use the euro. Designed to restore confidence in lenders by breaking the link with their sovereign governments, the exercise may force banks to boost capital and could prompt further deleveraging, ECB President Mario Draghi, said earlier this month.
“The balance sheets are still so big,” said Guillaume Rambourg, founder of Paris-based hedge fund Verrazzano Capital. “That’s what European banks really haven’t addressed, which is the size of the balance sheet, the gearing to their capital base. Everything they can do to accelerate the balance- sheet reduction and increase the capital ratio will be welcomed and rewarded, probably, by the market.”
Investors have favored the shares of U.S. lenders. The KBW Bank Index of 24 U.S. banks rose 35 percent in 2013, compared with the 19 percent gain by the Bloomberg Europe 500 Banks and Financial Services Index. New York-based Goldman Sachs, the fifth-largest U.S. bank by assets, rose 39 percent, while Bank of America, the second-biggest U.S. lender, gained 34 percent and JPMorgan rose 33 percent.
Europe’s biggest bank, London-based HSBC Holdings, Banco Santander, Spain’s largest lender, and Deutsche Bank rose less than 10 percent. Investor confidence is reflected in the valuations of European banks, which trade at an average 1.2 multiple of tangible book value compared with 1.9 times for U.S. banks, the bank indexes show.
Bank profitability is well below pre-crisis levels, increasing pressure for cost cuts. The average return on equity for the top eight securities firms — Goldman Sachs, JPMorgan, Deutsche Bank, Citigroup, Morgan Stanley, Bank of America, Barclays and UBS — was 4.2 percent in the third quarter, according to data compiled by Bloomberg. Deutsche Bank posted a negative return of 0.9 percent, the data show.
Banks are struggling to increase revenue and profits amid sluggish economic growth and rules that limit profitability, including new capital requirements approved by the Basel Committee on Banking Supervision, restrictions on commodities trading and the Volcker Rule in the U.S. that seeks to curtail banks’ bets with their own money.
“Some of the business models are still not viable, particularly in corporate and investment banking,” said Henrik Naujoks, Frankfurt-based head of the financial services practice for Europe, Middle East and Africa at consulting firm Bain & Co. “In the past six months, we’ve received lots of requests from banks to assist them in becoming more client-centric, and it comes as banks are fighting to restore their reputation and secure their top line.”
Among bank leaders in Davos this week are Standard Chartered’s Sands and Bank of America CEO Brian Moynihan, who will be participating in a panel discussion on Wednesday about the global financial outlook. They’ll be joined by Herman Gref, chairman and CEO of OAO Sberbank, Russia’s biggest bank.
Sands, 52, is coming to Davos after scrapping his company’s target of achieving a minimum 10 percent in annual revenue growth. The stock dropped 14 percent last year. Moynihan, 54, whose bank quadrupled profit in the fourth quarter, resolved disputes tied to home loans and foreclosures. Charlotte, N.C.-based Bank of America’s stock reached the highest in more than three years.
Michael Corbat, 53, CEO of Citigroup, the third-biggest U.S. bank, and Morgan Stanley CEO James Gorman, 55, both of whom will be in Davos, aren’t participating in any panels. Goldman Sachs CEO Lloyd Blankfein, 59, will join billionaire Wang Jianlin, head of Dalian Wanda Group, the Chinese company that controls U.S. movie-theater chain AMC Entertainment, in a session titled “China, Europe, U.S.: The Co-Opetition Challenge.”
Wednesday’s panel, entitled “Are Markets Safer Now?” will pit Admati, who’s making her first appearance at the annual meeting, against Barclays CEO Antony Jenkins, HSBC Chairman Douglas Flint, and Paul Singer, founder of New York-based hedge fund Elliott Management. Singer last year accused the financial industry and some individual banks of still being too big, too opaque and too indebted.
The road to rebuilding confidence in banking will take at least a decade, Jenkins, 52, said on BBC Radio 4’s Today program on Dec. 31. He declined to comment for this article. The executive is returning to Davos amid an overhaul of the bank that includes closing a profitable operation that helped wealthy individuals and businesses cut their tax bills.
“These people before were the masters of the universe,” said Crispin Odey, founding partner of London-based Odey Asset Management, which oversees $11.6 billion. “They feel that they are the butt of every regulatory change. They don’t feel in control of the situation. They feel like they find businesses where they can make easy money, and then the regulators tell them they can’t do it anymore.”
—With assistance from Jesse Westbrook in London and Nicholas Comfort in Frankfurt.