J.P. Morgan just published its first quarter results for 2015. They're unexpectedly good - especially if you work in the investment bank, in M&A, or FX, or US cash equities. And even if you don't work in any of these areas for JPM, there are implications. This is what J.P. Morgan's recent results are saying in your ear.
You thought corporate and investment banking (CIB) was dead? How wrong you were. If J.P. Morgan is representative of broader reality, banks are going to be increasingly reliant on their CIB businesses this year.
Revenues in JPM's CIB rose 8% year-on-year in the first quarter and profits rose 19%. In the process, the CIB out-performed all other JPM businesses: the closest comparable performance was from the bank's asset management business, where revenues rose 7% and profits 11%.
The CIB now accounts for 43% of JPM’s profits, up from 40% in the first quarter of 2014.
J.P. Morgan is supposed to be cutting $2.8bn of costs from its corporate and investment bank by 2017. In the first quarter, however, costs in the CIB actually rose by 1% year-on-year in absolute terms. This didn't especially matter because revenues rose 8% and the overhead ratio fell from 63% to 59% over the year. Return on equity in the CIB rose from 13% to 16% over the same period.
Revenues in J.P. Morgan's M&A business rose by 42% year-on-year. That's huge. If other banks turn in similar results, it's easy to see why the banking industry as a whole is frantically hiring juniors to execute deals. J.P. Morgan thinks it outperformed the market, however: CFO Marianne Lake said the bank increased its M&A market share by 150 basis points.
The debate as to whether fixed income revenues were low because of structural changes to the market (higher capital requirements etc.) or because of a temporary aberration (abnormally volatility), has now been answered: volatility was the culprit. Now that volatility is back, revenues are back. Or so it seems. In the first quarter, revenues in JPM's fixed income sales and trading business rose 20% on a like-for-like basis. "We're seeing good client flow and volatility does feel elevated," said Lake. Promisingly, Lake said the "expertise" of J.P. Morgan's traders helped steer the bank through. Less promisingly, she said the strength of the first quarter is now tapering off a bit.
Revenues at JPM's investment bank may be rising, but it's still cutting jobs. The bank has eliminated 330 people from the CIB since December 2014. Admittedly, that's less than 1% of the total headcount.
After years of cutting Value at Risk (VaR), J.P. Morgan is allowing the measure to creep up again. Witness the chart below.
Ok, so it's early in the year to be thinking about bonuses, but it's notable that J.P. Morgan cited an 'increase in performance related pay' as one reason why expenses in the CIB increased in the first quarter.
Just as investment bankers' star is ascendant, asset managers' star is on the wane. Headcount in J.P.'s asset management business was stable year-on-year in the first quarter, but its number of client advisors fell by 4%.
Maybe 'corporate' is the place to be. Between the first quarter of 2014 and the first quarter of 2015, headcount in J.P. Morgan's corporate business went from 22,474 people to 27,019 people - an increase of 20%. Where did all these people come from? J.P. Morgan didn't say, although it did mention extra spending on 'controls'. The corporate business includes treasury, the notorious chief investment office (CIO) and J.P. Morgan's private equity operations. It made a loss of $173m in the first quarter - something to do with, 'the amortization of cash flow hedges, primarily related to the exit of certain non-operational deposits.' Maybe it still needs to hire a few more people?