Late last night, J.P. Morgan released its Q3 results after hours. If you work in the corporate and investment bank (CIB) they were ok, but not great. The business continues to shrink – slowly – net revenues were down 3% in the first nine months of 2015 compared to the previous year.
These are the details you need to know.
1. It has been, and continues to be, an excellent year to work in M&A
Advisory revenues at J.P. Morgan were up by 27% year-on-year in the first nine months of 2015, and by 22% year-on-year in the third quarter.
2. It’s been a bad year to work in ECM, and things are getting worse
Conversely, 2015 has been a terrible time to work in equity capital markets, and the situation in ECM businesses is deteriorating. J.P. Morgan’s ECM revenues fell 10% year-on-year during the first nine months of 2015. The pace of the reduction accelerated in the third quarter, with revenues falling by 35% on 2014.
It’s a particularly bad time to be an ECM banker in Europe: J.P. Morgan blamed its EMEA business for the revenue rout.
3. It’s been a bad year to work in credit trading, and things are getting worse here too
There was no respite for credit salespeople and traders in the third quarter. At J.P. Morgan, fixed income currencies and commodities (FICC) revenues fell 11% on a like-for-like basis, a decline the bank said was due to, “continued weakness in credit, partially offset by strength in currencies and emerging markets.’
In the call accompanying the results, J.P. Morgan CFO Marianne Lake said it had become harder to make money in credit because clients are less active. Worse, Lake said this quietude has persisted into the fourth quarter and that on this basis analysts’ estimates for the bank’s performance for 2015 as a whole, “appear high.”
4. It’s a fine year to work in equities trading
J.P. Morgan has traditionally been a laggard when it comes to equities trading, but it may now be catching up. Year-on-year, equities sales and trading revenues were up 19% in the first nine months of 2015. In the third quarter, they were up 9%. J.P. Morgan said the increase applied to both the cash and the derivatives business and that the growth was attributable to, “higher client volumes.”
5. It’s still not good enough
In the last quarter, J.P. Morgan’s corporate and investment bank generated a return on equity of….8%. During the same period, the overhead ratio in the CIB was 75%.
J.P. Morgan is in the process of cutting $1bn in costs, some of which are expected to come out of its corporate and investment bank.
Lake announced another $500m of cost cuts yesterday. Maybe ECM bankers in Europe and credit traders everywhere should be worried?
6. Spending on pay is falling
Revenues at J.P. Morgan’s CIB were down 3% year-on-year in the first nine months of 2015. Compensation spending was down 4%. Headcount was also down 4%.
On a per head basis, pay looks stable. However, compensation continues to dwindle as a proportion of the revenue that’s coming in.
“We’re always going to be diligent on expenses,” declared Lake. Don’t expect a big bonus.
7. But net headcount is rising
J.P. Morgan is adding CIB staff faster than it’s cutting them. In the third quarter, headcount rose by…17 people.
Q3 is when banks’ analyst and associate hires arrive. J.P. Morgan’s analyst and associate classes number in the several hundreds, suggesting the bank has also made some dramatic cuts at higher levels.
8. Comparatively speaking, J.P. Morgan’s traders have been unleashed
In the third quarter, value at risk (VaR) in the trading business of J.P. Morgan’s corporate and investment bank rose by…74%. This follows years (and years) in which VaR declined.