If you don't work for Goldman Sachs and you want to work for a top U.S. bank, where should you work? You could try J.P. Morgan, which seems to be top in just about everything to do with investment banking these days. Then again, you might want to give J.P. Morgan a miss. A new report by banking analysts at Goldman Sachs suggests J.P. Morgan might have a few issues.
Before we get to the downsides of JPM as highlighted by GS, it's worth pointing out that it's not all bad. As the chart below (taken from Goldman's report) shows, J.P. Morgan exceeded expectations for earnings per share by 11% in the second quarter, driven mostly by higher fee income. (Click to expand)
Equally, in the chart below, Goldman identifies J.P. Morgan as one of the banks that has performed best year-to-date - compared both with analysts' expectations and with previous periods. And based upon J.P. Morgan's strength in equities and fixed income sales and trading, Goldman has the bank as its top stock pick along with Citi.
However, it's not all sunshine at J.P. Morgan. Goldman analysts also identify a few hailstones. In the first place, expenses at J.P. Morgan negatively impacted expected earnings per share in the second quarter (see the first chart above), suggesting J.P. has more cost cutting to do.
Secondly, J.P. Morgan has also warned that its mortgage revenues could decline by 30% if rates increase.
Most importantly, however, Goldman analysts say J.P. Morgan still looks seriously under-capitalized. As the chart below shows, JPM is now the only major U.S. bank with an ongoing capital shortfall under Basel III requirements. It is also the U.S. bank with the worst Basel III supplemental leverage ratio and it is the U.S. bank with by far the biggest capital shortfall before the 6% minimum-leverage ratio can be met.
Conclusion? Goldman analysts think J.P. Morgan is a great bank. You might want to work there. But it still has some serious work to do if it wants to comply with Basel rules by 2015. And this could be disruptive in the near term.