JPMorgan Boosts Tech Banking Team Is Reason For Investors To Celebrate
JPMorgan Chase (NYSE: JPM), America’s largest bank by assets, recently announced the hiring of five new bankers to bolster the technology and venture capital banking group it launched in 2019. JPMorgan’s announcement is, at more important in my opinion, because tech banking is a great business and also a niche business. It’s also a unit JPMorgan investors should pay attention to, because the bigger and bigger the profits, the better it could be for the bank.
Technology and venture capital banking is a niche segment of banking, which means it is a niche segment of the market that only a handful of banks offer. This requires lenders with specialized skills and relationships with venture capitalists and within the start-up ecosystem. It can also be very risky as start-ups have a high failure rate. However, if done correctly, technology banking can be extremely profitable.
On the venture capital side, the main product of most banks in this area is called the call capital line of credit. These are short-term loans to venture capital and private equity firms that try to quickly execute the investments they make in start-ups or businesses. AT Silicon Valley Bank (NASDAQ: SIVB), the bank that really pioneered technology banking, I know capital call lines can carry an interest rate that tracks the prime rate minus a quarter of a percentage point. In the current climate, that would be an interest rate of around 3%.
Image source: JPMorgan Chase.
Why is this important? In 2020 and even now, deposits have poured into the banking system, which is normally a good thing. But the banks had nowhere to deploy these deposits and are still struggling to do so because we have been in a recession. This left the banks with a difficult decision: to invest the excess liquidity in the bond market for additional yield or to wait for opportunities to present themselves. Most banks decided to wait for most of their excess liquidity because bonds, like the 10-year Treasury note, still only pay a paltry return.
However, last year, as investors lacked performance, private markets were one of the few areas to explode. Recessions tend to bring in a lot of new entrepreneurs because unemployment rises and more and more people are forced to go out and try to get out on their own. It can also be a time of disruption. The pandemic has forced the majority of the country and the world to operate remotely, which has accelerated the use of digital technologies.
Ultimately, banks with capital call lines had the ability to deploy their excess liquidity at a rate much higher than what could be obtained in the bond market. This makes tech banking more resilient than many other credit segments because it can thrive in times of downturn. Capital call lines are also considered very secure – Silicon Valley Bank has not suffered any net losses in this lending segment since it began lending in the 1990s.
The other major component of the technology group is the bank for start-ups and start-ups. Banking doesn’t just mean holding a startup’s deposits, but also offering payment services such as wire transfers and direct deposits, as well as providing loan products.
There’s a reason 90% of startups fail, and that’s because they’re risky businesses with very little proven traction. But because they are riskier, banks can usually get incentives from start-ups, such as warrants, that entitle them to shares in a future initial public offering. For example, it recently emerged that Silicon Valley Bank, which agreed to bank the Coinbase cryptocurrency exchange in 2014, has an exceptional mandate in Coinbase’s upcoming IPO. The warrant gives the bank the ability to purchase over 400,000 Class B common shares at just over $ 1 per share, making the warrant worth up to $ 152 million.
Banks can benefit from start-ups in other ways. For example, if JPMorgan funds a start-up, then five years later they go public, the bank can hopefully use that relationship to pass the start-up down to their world-class investment bank. , who could make a lot of money serving as an underwriter in the IPO. Start-up founders, when they are successful, also turn into wealthy people. Bank may use its previous relationship with to sell other products such as jumbo mortgages and asset and wealth management products.
During the pandemic and over the past decade, tech banks and banking start-ups such as Silicon Valley Bank and First Republic Bank (NYSE: FRC) outperformed the sector. So it’s great to see JPMorgan go further in this area, especially because its technology group can further complement its investment bank and also identify people to whom the bank can sell other products.
Technology banking has also performed well during recessions and can benefit from higher rates as the interest they can charge on capital call lines moves with shorter-term rates. Additionally, this is a niche segment of banking that is difficult for other banks to get into. Considering that JPMorgan excels in almost every aspect of banking, I have no doubt that it can develop its technology division to perform as well.
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