J.P. Morgan’s fourth quarter results are out. You can see them here. Or, if you work for (or aspire to work for) J.P. Morgan’s investment bank, you can read a summary of the bad news below.
1. J.P. Morgan’s corporate and investment bank is becoming less, not more, profitable
In 2014, revenues in the corporate and investment bank (CIB) were stable. Operating costs in the corporate and investment bank rose 7%. Overall, profits in the corporate and investment bank fell 22% in 2014 compared to 2013 (or by 27% once accounting adjustments are stripped out according to William Wright of think tank New Financial).
In other words. J.P’s CIB needs to save some money. In the fourth quarter, costs rose to a really horrible 74% of revenues.
2. Falling profits are not due to higher pay
If you’re a banker at J.P. Morgan, a fall in profits might be OK, if only it were the result of a bit increase in remuneration. Unfortunately, falling profits mostly resulted from a big increase in legal costs.
Compensation costs at J.P.’s CIB fell 4% last year. Non-compensation costs rose 18%. Average pay per head for 2014 was $204k (this is the average for corporate bankers and employees at the investment bank), down from $207k in 2013. The bank specifically says that it cut compensation expenses in the fourth quarter. For the whole year, compensation expenses fell to 30% of revenues (down from 31% in 2013).
In other words, don’t expect this year’s bonuses to be bigger than last year’s.
3. The return on equity in the CIB is moving in the wrong direction
All banks want to keep shareholders happy and increase their return on equity (RoE). Unfortunately, RoE at J.P. Morgan’s corporate and investment bank fell from 15% in 2013 to 10% in 2014.
In other words, JPMorgan needs to increase revenues or cut costs. Compensation costs look like the most flexible option (downwards).
4. 2014 was a bad year for everyone at J.P. Morgan’s CIB, except the M&A bankers
Revenues in J.P. Morgan’s advisory (M&A) business rose 24% last year. This was a good thing as revenues in its fixed income sales and trading business fell 13% and revenues from debt underwriting fell 4%. Equity underwriting was OK (a 5% increase), but not that impressive given the strength of the IPO market. And J.P. Morgan’s equity sales and trading business (which it wants to expand) managed revenue growth of a mere 1%.
In other words, jobs anywhere but M&A and ECM could be at risk.
5. Things are getting worse, not better
The M&A engine faltered in the fourth quarter, with revenues stable on last year. Meanwhile, equity underwriting revenues fell 25% and fixed income sales and trading revenues fell 23%.
In other words, bonuses will possibly be dreadful in fixed income.
6. Traders are being hobbled by risk aversion
Value-at-risk (VaR) across J.P. Morgan’s CIB fell 19% year-on-year in 2014. This was partly due to a massive (43%) cut in VaR in J.P. Morgan’s commodities business, which it’s been scaling back since selling parts of its physical commodities trading business to Mercuria), but VaR fell by 21% in other areas of fixed income too.
In other words, trading jobs at J.P. Morgan are less exciting than they used to be.
7. Corporate/private equity are where it’s at: headcount rose 26% over the past year
While headcount at J.P. Morgan’s corporate and investment bank fell by 1,121 people last year, headcount in the ‘corporate/private equity’ division rose by a massive 26% in 2014.
‘Corporate/private equity’ at JPMorgan includes the bank’s treasury business, it remaining private equity business, the chief investment office (CIO) of London Whale fame and ‘other corporate’ activities. It looks like a growth area. The only problem is the pay. At $111k per head, it was nearly half that in the corporate and investment bank.
[Correction: This article originally said headcount had increased in asset management. That was wrong – asset management headcount at JPM fell by 2% last year.]