JPMorgan Investment Bank Avoids Crisis, for Now
According to median estimates compiled by Thomson Reuters analysts expected JPMorgan to earn $23.4 billion in revenue, making management's forecast of $4.77 billion in investment banking revenue, roughly 20 percent of overall forecasted revenue the smallest revenue contribution by the investment bank since it nearly pushed the overall bank to a loss in the fourth quarter of 2008.
It's also a reversal of the trend of stalling investment banking revenue for now, which accounts for between a quarter and a third of JPMorgan's overall revenue and has, in post-crisis quarters, supplied up to 75 percent of overall profits to the second largest bank in the U.S.
For JPMorgan's investment bank, which has shown quarter-over-quarter declines in revenue in six of the last seven quarters, it dampens expectations earlier in the year that 2011 would be better than 2010. In the first two quarters of the year, revenue increased 16 percent and net income increased 49 percent.
Falling revenue and an increase in profits were driven by expense savings, mainly pay. Compensation expense as a percentage of revenue fell to 29 percent, from 35 percent in the second quarter and 38 percent a year earlier — overall the investment bank paid employees $1.85 billion.
Barclays Capital's Goldberg wrote in his note, "As revenues decline, we would expect a commensurate decrease in expenses. Using JPM as an example, if trading revenues fall 30 percent and investment banking declines 47 percent, and it maintained a 35percent to 40 percent comp ratio, comp expense could decline 25 percent to 35 percent."
Investment banking fee revenue fell 46 percent to $1.04 billion, after growing 23 percent and 37 percent in the first and second quarters respectively when compared with 2010. In the second quarter, the investment bank posted its best quarter since earning $2.24 billion in that period two years prior.
According to Dealogic, global investment banking revenue was $13.5 billion in the third quarter, the lowest level since the first quarter of 2009 and down nearly 40 percent from second quarter levels of $21.4 billion.
The third quarter results still showed that JPMorgan led all banks in investment banking fees, taking an 8.4 percent overall market share. Results showed that through the first nine months of the year, it led all banks in fees earned from debt issuance and was second in equity capital market, merger and acquisition, and loans fees earned.
Total fixed income, currency, and commodity trading revenue fell to $3.33 billion below $4.28 billion earned in the prior quarter, but more than $3.12 billion this time last year. Meanwhile, equity trading increased to $1.42 billion from $1.22 billion in the second quarter and $1.14 billion at this point in 2010. Overall, FICC trading revenue is up 6 percent and equity trading is up 11 percent nine months into the year, when compared to 2010.
JPMorgan's shaky investment banking earnings numbers may be a harbinger of things to come as Morgan Stanley, Goldman Sachs, Citigroup and Bank of America all report earnings in coming weeks. For other banks, falling revenue from operations may be erased by gains from their widening credit spreads.
"Third-quarter 2011 has been a very difficult quarter for market making across the Street, particularly in FICC trading... We are currently forecasting the median bank's FICC revenues to decline 14 percent and equity trading revenues to increase 17 percent from the second quarter of 2011," wrote analysts at KBW in a Sept. 26 note.
In a separate note written following JPMorgan's muted outlook for investment banking, Mike Mayo of CLSA wrote, "We think these lower activity levels will carry forward until the global economic and market outlooks improve."
If debt revaluation gains based on gains related to widening bank credit spreads are readjusted to losses, management and analyst pessimism for investment banking revenue may be realized in coming quarters.
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