Heidi Miller, CEO of JPMorgan Chase Treasury & Securities Services, came to the finance industry by accident. She didn't find any "interesting" Latin American history jobs in academia after finishing her Ph.D. in history, but banks were expanding their business into emerging markets, particularly in Latin America. She jumped at the chance.
Ms. Miller joined JPMorgan through the Bank One merger in July 2004 and quickly set out to refocus and transform the TSS unit, which provides everything from custody and fund administration services to cash management.
The transformation is complete: in 2005, the business' revenues rose 16% to $6.24 billion from $5.4 billion in 2004, and operating earnings surged 137% to $1.03 billion from $437 million. The unit contributed 10% of JPMorgan's overall revenue last year and 8% of its earnings.
But that doesn't mean Ms. Miller's work is complete, because the business continues to evolve. Rapidly.
What area of the business do you see as having the most potential for revenue and profits? There are still so many opportunities for us to harvest in our own backyard that not a day goes by without another idea or observation that could make us better at what we do. (We) are very focused on growing our business organically and doing what we do more effectively and more efficiently.
What are some of those opportunities and ideas? On the cash side, we're big in stored value cards. That's part of our emerging franchise.
We provided FEMA (Federal Emergency Management Agency) with emergency cards (after the hurricanes of 2005). We equip many of the ships in the Navy. Sailors get paid in stored value cards, not checks and currency.
The world talks about hedge fund administration as a $1.2 trillion market. Clearly that's a market that's sizable; with a revenue stream at that asset size, we clearly can make good money even if we pick up a small share of the market. I think, given our product set, we can do even better than a small share.
That's a big idea that perfectly extends the product set that we're in.
How do you pick and choose? How we look at it is, we see markets, and sometimes they're sizable. Sometimes they're slight extensions of what we do, sometimes they're extensions but require some investment, and sometimes you see markets that are smaller but really don't need much of an investment at all, it's just about how you package and sell an existing product.
From a strategic standpoint, you have to assess all of those things and what it will require you to invest in order to execute well.
We've gotten out of a couple of products. We can do multinational treasury processing in Europe and be their back office, but when we actually looked at the number of customers that might actually require that service, we realized it was never going to be significant enough and therefore not scalable.
Are the treasury and securities services businesses all about scale? The operating services business, both on the cash and securities side, is a highly leverage-able operating business. You can build the factory in a scalable way and the more throughput, the better off you are, so it's really about how to manage a commoditized product set.
The custody business is a scale business, and you can look at (the business) and ask what are the synergies that you could bring out of a merger of two big global custodians. And they are, quite frankly, significant.
Will JPMorgan be an acquirer? We certainly always are going to be interested in acquisition opportunities, either books of business or new product sets that have been developed. We bought a logistics company last year.
That said, I think we have significant internal growth opportunities.
Theoretically, could a deal between global custodians make sense? The answer is yes, but that's not the sole reason a deal's going to get done.
If monolines (firms that only offer custody) have sufficient capital and continue to thrive or produce decent returns, they're not necessarily going to look to find returns through consolidation.
I think, over time, it will be more difficult to run a monoline as effectively as we might be able to do. It gets into their ability to develop new product or invest in new product.
We're blessed with not only a great brand but with phenomenal capital strength that gives us the wherewithal to continue to invest in our franchise. If I were a less well-capitalized monoline, then my ability to invest over time or provide the credit support to my customers would perhaps be diminished. It's hard for a less well-endowed company to compete, and I think that drives the discussion over consolidation.
At the end of the day, these are scalable platforms, and the more throughput you can find, the better your returns are going to be and the more effectively you can price both for your customer and your need to protect your return.
Custody is a scale business. Isn't it also a commodity? How can you make money from that business? Custody is a commodity, by and large. There's a fair amount of transparency in pricing.
But you can't be in securities lending unless you're in the custody business, so you make your money on securities lending, which is the value add, not the custody. Your differentiator is the ability to get extra return on behalf of your customers and your ability to service your customers. Customer service is never a commodity.
There is a core set of things that you can price effectively. They're scalable and transparent. There's also what you would call add-on services, where your differentiation is your service levels and the facility of the connectivity between the customer and those services.
What are the opportunities for JPMorgan TSS in emerging markets? The custody business and the cash business are the leading drivers of some of our presence in some of these emerging markets. We're going to continue to play the role we do so well, which is a global custodian to emerging asset classes that our asset managers are interested in.
I think the broader question for the firm is how would we see ourselves playing in the China market. Clearly, we look at the billion-plus people in China … that's a very interesting franchise for all our businesses.
We have renminbi capability as provided by the law, we are interested in continuing expansion of our investment banking advisory business, and we clearly have some ongoing interest in maintaining and growing our custody position.
Then, over time, as investment opportunities emerge, we will look at them comprehensively. Anything we do on that basis should add value to all our franchises, including operating services.
The same is true for India. In addition, India's become a hub for some of our operating back-office processes. In my business alone, we have close to 1,000 people doing back-office support out of Mumbai.
The India market ultimately is a big and fascinating market, but I'm always wary because there are people who've been saying that China and India are fabulously interesting markets for the last 20 years. I think you have to act with care sometimes. You don't necessarily have to be the first one in a market.
