Wall Street's largest spending issue is with JPMorgan.

• This year, J.P. Morgan shares, like other big bank stocks, have been subject to pressure. However, the bank has faced unique scrutiny due to its rising spending.
• JPMorgan CEO Jamie Dimon sees the billions spent on digital expansion overseas and other technology goals as necessary amid rising business threats.
• JPMorgan has a strong history of generating returns, but assessing the value of technology investments is more challenging.

Jamie Dimon has built his reputation as a reliable leader in the banking industry by consistently meeting targets and maintaining a tight ship. However, as JPMorgan prepares to release one of the key earnings reports of the season, Dimon is focused on resolving a messaging conflict that the bank has faced in recent months. Following the bank's last earnings report, which revealed a $3.5 billion increase in spending compared to previous forecasts, analysts and shareholders expressed concerns.

In his annual letter to shareholders, Dimon defended bank spending, particularly on technology, citing the threat of fintech rivals and market giants like Walmart and Apple encroaching on their territory.

Dimon has frequently discussed the threat issue in recent years, and he labeled one part of the letter "Competitive Threat Redux." The related spending issue is unlikely to resolve, and the Wall Street pushback that started last quarter is likely to persist.

The gap between investors and JPMorgan may be difficult to bridge through any CEO letter or quarterly report. Technology investments are necessary, but determining the return on investment in the short term is challenging in the tech spending area. Last quarter, the $3.5 billion added to an already increasing investment profile was a significant amount, even for a management team that has a proven track record of generating returns on investment.

Jim Mitchell, Seaport Global financial services sector analyst, stated in an interview after the last earnings that none of the things mentioned occur in isolation and the management team has a track record of execution. He emphasized that the management team plays a crucial role, so investors should give them some credit for their spending. However, from an investor's perspective, this represents a significant increase in expenditure.

"The magnitude of the bank's expense guidance exceeded expectations," he stated.

JPMorgan's 17% year-to-date decline is one of the larger losses in the big bank group, as the banking sector has been in the red this year.

Mitchell remarked, "There is a 'little bit of near-term purgatory,' and I was taken aback that they didn't provide a more comprehensive response than 'we need to do it.'"

Dimon's letter to shareholders reiterated his previous warning about the pervasive threat of technology.

Dimon stated that $130 billion was invested in fintech last year, which allowed them to speed up processes and scale up operations. He emphasized that the pace of change and competition in the industry are extraordinary, and activity is accelerating.

Walmart, with its 200 million weekly customers, and Apple, with its existing digital payment services and expanding into payment processing and risk assessment, are both utilizing new technologies to bring banking-type services to their customers.

As Dimon stated, a diminished role for banks is taking place alongside the numbers.

• The percentage of U.S. debt and equity markets that U.S. banks' loans represent has decreased from 11% in 2010 to 8% currently.
• The percentage of mortgage originations owned by banks has decreased from 91% to 32%.
• Over the past 20 years, the percentage of leveraged loans held by banks has dropped from 46% to 13%.
• Neobanks now have over 50 million accounts.

Dimon wrote, "Although I could continue elaborating, it's enough to say that we must prepare for this trend to persist. Sometimes, change is inevitable."

According to Gerard Cassidy, large cap bank analyst and head of U.S. bank equity strategy at RBC Capital Markets, all the big banks are investing heavily in technology and spending similar amounts relative to their assets in recent years.

In an interview following the last earnings, Cassidy stated that half of the bank's tech spending is used to maintain its operations, while the other half is allocated for changes and improvements.

While Bank of America's spending remains flat, JPMorgan's spending continues to increase.

Cassidy acknowledged that the cost of JPMorgan's overseas expansion, particularly in England and a completely digital strategy, may not have been fully appreciated by investors until now.

In his annual letter, Dimon suggested that starting from scratch to create a virtual version of existing physical branch networks in the U.S. is the best approach for expanding overseas. However, he did not provide much clarity on this matter.

Dimon wrote that the digital world presents an opportunity to establish a competitive consumer bank outside the US, which does not exist in the physical world. He believes that by leveraging their experience in their leading US franchise and applying it to the new venture, they can succeed. Despite the possibility of failure, Dimon expressed confidence in their ability to succeed.

Banks are starting to provide more disclosure on digital, while investors are seeking more concrete data.

Bank of America is revealing more digital statistics and has demonstrated its capacity to expand its consumer business digitally, with nearly half of all consumer bank product sales taking place through digital channels and deposit transactions at ATMs approaching 90%.

There will be a greater demand for information on the effectiveness of technology investments in transforming the banking industry.

Cassidy stated that these are the metrics that should be observed to assess the strength of digital adoption among banks.

While analysts acknowledge that generating metrics on the payoff of technology investments can be challenging in the short term, there is a growing demand for banks to demonstrate the level of returns that are acceptable. This is particularly true when banks are given a large budget to invest in technology. As Cassidy stated, "We want to see the metrics supporting success, and the more reluctant a bank is to disclose, the more people start to scratch their heads."

In the letter to shareholders, Dimon stated that investments in technology and operations, totaling slightly under $2 billion, are the most complex category.

The term "modernizing" or "adopting new technologies" is often used to describe some expenses. However, it is not accurate to assume that these expenses will decrease significantly once a modern platform is reached. In reality, technological innovation is driving change at an increasingly faster pace.

What is the point at which the annual increases level off? Is it possible to spend $20 billion a year in a systematic manner, or does it become reckless at some point? Mitchell inquired.

Greater operating leverage and incremental margins should result from proof over time, measured in above average growth across platforms and market share gains. Additionally, JPMorgan's management team's track record and aggressive approach to staying ahead of technological changes should inspire confidence.

Mitchell stated that there should be a crossover to efficiencies and improving margins at some point. Currently, Dimon is only assuring that they will be successful in the long run, but it is difficult to predict when the market will be convinced of this and not focus on expenses. Mitchell emphasized that they will be monitoring the situation every quarter and checking for progress.

It's possible to give JPMorgan the benefit of the doubt, but it's difficult to measure the success of the strategy in less than 6 months.