JPMorgan's Investment Banking Gaining on Goldman

JPMorgan Chase has snapped up market share for its investment banking unit and, amid the financial crisis, its large balance sheet may put it in a position to threaten Wall Street's dominant investment bank, Goldman Sachs.

Analysts largely expect the investment banking unit at the second-largest U.S. bank to again report strong second-quarter results, following record first-quarter revenue.

A retail giant with a reputation for conservative risk-taking, JPMorgan has survived the financial crisis and benefited from its acquisition of near-collapsed investment bank Bear Stearns.

"JPMorgan can compete with, and beat, Goldman Sachs," said Dick Bove, a veteran banking analyst with Rochdale Securities.

With $2.1 trillion in assets, JPMorgan dwarfs Goldman, which has $925 billion, and also Morgan Stanley, the former investment bank traditionally seen as Goldman's closest rival, which has $1.1 trillion.

The strength of its balance sheet could be an advantage, in particular since these banks this month returned billions to the U.S. government's bank bailout fund, known as the Troubled Asset Relief Program.

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After TARP, "The cost of capital becomes key, and there JPMorgan has a clear competitive advantage," said George Ball, chairman of wealth and asset manager Sanders Morris Harris Group in Houston.

JPMorgan's size means it can lend more to more clients, giving it a better chance to sell other services, Bove said. "JPMorgan comes to the game with massive capital backing and a huge customer list—it's going to do the greater number of deals," he said.

A Goldman spokeswoman declined to comment.

Level Playing Field

JPMorgan has regularly ranked highly in global league tables for debt and equity underwriting but it has not always had as strong an advisory or proprietary trading effort.

Yet in the first quarter, JPMorgan said trading revenue was $2.5 billion versus a negative $1.0 billion in the same period a year earlier.

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The bank has warned that trading revenues may be volatile, but analysts believe it may be on track to report second-quarter trading revenue similar to the first quarter's.

"Trading results, while probably not as strong as the first quarter, will still be pretty strong," said Stuart Plesser, equity analyst at Standard & Poor's.

Over the same period, Goldman—which has sometimes been accused of acting more like a hedge fund than a bank—has seen its proprietary investing hamstrung by new capital requirements.

Goldman and Morgan Stanley converted to bank holding companies in the fall, after investment bank Lehman Brothers filed for bankruptcy, to reassure investors and gain access to Federal Reserve lending facilities.

As bank holding companies, the former investment banks cannot leverage their balance sheets as they did in the past.

"The banks and the two surviving brokerage firms are really now on a level playing field in terms of trading," said Brad Hintz, analyst at Sanford C. Bernstein in New York.

To be sure, Goldman's investment bank is expected to perform well in the second quarter. Analysts at FBR Capital Markets on Tuesday raised their second-quarter estimate for the company, citing likely gains from a favorable trading and capital markets environment.

It is also possible—although the bank has denied this—that Goldman may seek to shed its bank holding company status.

JPMorgan's investment bank dominated the second quarter with global estimated second-quarter investment banking fees of $2 billion compared with $1.32 billion for Goldman Sachs, according to an exclusive tabulation by Thomson Reuters including income from merger and acquisition advisory activities, equity, debt and loan issuance.

JPMorgan saw a drop of 14 percent in such fees from the year-earlier period, while Goldman suffered a 28 percent drop. Certainly, while other competitors may face rising credit losses, or labor to repay government funds, there will be more than enough business for both banks to share.

"It's not one of those situations where there's only one winner," said Hintz.

But in the near term, JPMorgan's strength and size give it an edge when it comes to winning business in uncertain financial conditions.

"From the standpoint of force majeure, Goldman can't match JPMorgan at all," said Bove.

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