All that squeezing may be starting to pay off. With costs taken out and revenues bouncing back, the two U.S. have increased profits in their investment banks. Hiring should, surely, follow? (Surely?)
This is what you need to know.
Will 2017 be the year that U.S. investment banks hike their pay? Both Citi and J.P. Morgan said they increased accruals for performance related pay in their investment banks in the first quarter. If (if) this continues, bonuses should be up at the end of the year.
Citi doesn't break out headcount in its institutional clients group (its investment bank). At J.P. Morgan's corporate and investment bank (CIB), pay per head was up 9% in the first quarter of 2017. This is all the more exciting when you consider that the bank cut pay per head in its CIB by 11% in the first quarter last year.
If J.P. Morgan and Citi want to hire for their investment banks after Easter, they can certainly afford to. At Citi, profits in the institutional clients group were up 61% in the first quarter. At J.P. Morgan's corporate and investment bank they were up a similarly impressive 64%.
If the two banks were waiting to see how Q1 went before pulling the trigger on hiring therefore, the answer is now clear: it went well.
Improved profits come after costs were eliminated. J.P. Morgan cut costs at its CIB in 2015 and Citi implemented a cost cutting program last year. Costs now account for 54% of revenues at both banks, down from 59% at J.P. Morgan and 61% at Citi in the first quarter of 2016. The implication is that U.S. banks are now able to flex revenues without suffering a commensurate increase in their fixed cost base.
Just because banks can afford to hire, there's no guarantee they will. Despite its strong quarter, J.P. Morgan cut jobs in the CIB by 1% in first three months of the year, removing 367 people.
Equity capital markets look like they were the place to be in the first quarter. At both Citi and J.P. Morgan revenues increased by nearly 100% year-on-year. At J.P. Morgan, CFO Marianne Lake said this growth was despite the bank's ECM business also having a good first quarter in 2016.
If ECM bankers have had a good start to the year, the same can't be said for bankers in M&A. M&A revenues actually fell in Q1 at J.P. Morgan. Lake excused this by saying that prior year comparables were particularly challenging (although this didn't seem an issue in ECM...).
Much has been made of the ongoing big increase in fixed income sales and trading revenues. At both Citi and J.P. Morgan fixed income currencies and commodities (FICC) revenues were up over 17% in the first quarter.
This increase appears to have been driven by credit trading (particularly, we suspect, high yield). - Citi now breaks out trading revenues for macro and spread products and says its macro revenues were up 12% while spread products were up 37% on a year earlier.
Macro (rates and FX) trading revenues could increase further as the U.S. Federal Reserve implements further interest rate increases. For the moment, however, it's worth noting that the pace of increase in fixed income revenues may be slowing - Bloomberg notes that J.P. Morgan's 17% rise was the slowest for a year in its fixed income division.
With equities revenues increasing at both banks in the first quarter, the implication is also that equities sales and trading divisions might not be doing as badly as everyone thought. Citi attributed its 10% revenue increase to strong equity derivatives trading. This follows the reorganization of its equity derivatives business in July last year, when the bank hired Vincent Folliot from Bank of America Merrill Lynch to run its corporate equity derivatives business.
Citi doesn't break out VaR, but the increase in first quarter trading revenues at J.P. Morgan looks all the more impressive given a serious reduction in risk taking during the first quarter. Value at Risk (VaR) at J.P Morgan's CIB was 55% lower in the first quarter of 2017 than a year earlier. The reduction was biggest in equities (50%) and fixed income (39%).
Whilst cutting risk, J.P. Morgan is also raising the capital allocated to its investment bank. Trading assets allocated to debt and equity instruments were up 15% on last year. Could this be the start of a trend for giving traders more capital to play with (even they're made to take a lot less risk in the process)?
Lastly, don't assume it's going to get any easier to find an Asian banking job this year. J.P. Morgan doesn't break out revenues in its corporate and investment bank by region, but Citi does. As the chart below shows, Asia's still looking a little weak. Asia was the only place where revenues at Citi's investment bank fell in the first quarter, and profits in Asia were down a huge 60%. Credit Suisse's plan to go for growth in Asia is looking more dubious by the day....