J.P. Morgan on the Joy of Depositary Receipts
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J.P. Morgan (NYSE: JPM) discusses depositary receipts (foreign stocks traded on local exchanges) and the role DRs play in global investing. As one of the world's four depositary banks that manage the 3,600+ DRs around the globe, J.P. Morgan accounts for over 380 DR programs (with a market value of $249 billion) in 40 countries.
Dennis Bon is the Global Head of J.P. Morgan’s Depositary Receipts business. Before joining the DR team, Dennis held multiple roles within J.P. Morgan Treasury and Securities Services, including Global Head of Strategy and M&A in New York and Head of International Business Development in London. Dennis began his tenure at J.P. Morgan in European M&A Advisory. Prior to joining J.P. Morgan, he worked as an M&A banker at ABN Amro in Amsterdam, and obtained his undergraduate degree in Economics from Wilfrid Laurier University in Ontario and an MBA from the Richard Ivey School of Business at the University of Western Ontario.
Slepko: How did you get involved with DRs?
Bon: I’ve been with the firm over 13 years, first in investment banking on the M&A side, and then in several roles in corporate development and strategy. The depositary receipt business is global and is an interesting mix of capital markets, advisory, and operating services. I have experience in all these areas, so from a career perspective the DR business was a natural fit.
I joined the DR group just under a year ago, but having already worked with the business in previous roles, I already knew a lot about the product. Consequently, I’ve spent most of my time getting to know J.P. Morgan’s DR business and our client base.
Slepko: Where does J.P. Morgan rank among the four depositary banks?
Bon: There are two ways we typically measure it. From a market share perspective, the number of DR programs doesn’t really give you a meaningful measure of anything, mostly because a fair number of DR programs are quite small. The total trading value of the DRs that a bank sponsors is a far more significant metric. On this basis, we are the number two depositary bank. Average trading volume and value are also good measures of a DR program’s quality, as they give you a sense of their liquidity and size, and using that particular metric we are number one. In any event, we are not focused on size. By being selective and not chasing as many programs as possible, we are able to deliver more focused and higher quality services to our clients.
Slepko: How significant is the DR business for J.P. Morgan?
Bon: It’s a business that we pioneered 85 years ago and the firm has a lot of pride invested in it. In terms of the client base, we share a lot of blue chip clients with other areas of the bank, and there are synergies that benefit both us and our clients.
Also, the DR industry has been growing steadily over the long term, due to increasing flows of capital across borders. Clearly, conditions in the capital markets over the last few years have hindered the DR market, but it is a growth product for the foreseeable future. Largely its growth is being driven by emerging market companies, which are raising capital and listing in the US and in other equity markets around the world. With investor demand for emerging markets continuing to be strong, we see a bright future for the DR business.
Slepko: Is there a particular ADR that stands out in your mind as a success for J.P. Morgan?
Bon: No single ADR program stands out in my mind, ultimately because we do business with clients that are involved with our firm in other ways. The clients we take on board are happy with the decision to list a DR, and the more effort a company puts into their DR program, the more they get out of it. The companies that proactively promote their equity story outside of their home market typically see more uptake in the number of DRs created or traded.
In the past few years, we’ve been the first to market with HDRs (Hong Kong DRs). Three clients, from Brazil[Vale], Japan [SBI Holdings], and the US [Coach] have been the first to list their companies on the Hong Kong stock exchange via a DR structure. The process went well, and it’s a relatively new area of our business that we expect to pick up steam, both in terms of companies issuing HDRs and investors trading them.
Slepko: Why does the NYSE do better than the NASDAQ in attracting ADRs?
Bon: We have no particular bias, as both are high-quality exchanges. Historically, the NYSE was the obvious choice, because the NASDAQ was in an earlier stage of development. Now with both exchanges being highly competitive it has come down to issuer preference.
Slepko: Why does an issuer like Nestle choose to stay over-the-counter?
Bon: Some companies feel they get all they need – sufficient visibility and investor interest – with a program that is traded over-the-counter. Clearly, when a company lists on an exchange this entails higher costs, and that’s a commercial decision. However, there are a lot of well-known companies besides Nestle that feel they benefit from an exchange listing.
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Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication. The Motley Fool owns shares of JPMorgan Chase & Co. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
