Now that Goldman Sachs is no longer the very best investment bank in the world, that accolade has often gone to J.P. Morgan: no other bank ranked so highly in so many different product areas in the first half of 2017 according to research firm Coalition. However, J.P. Morgan’s investment bank didn’t do so well in the third quarter. Nor, we now know, did it do very well in the fourth – both by comparison with Deutsche Bank and by the reckoning of its own banking analysts.
As the chart below shows, J.P. Morgan’s sales and trading businesses significantly under-performed the market expectations published this week by its own banking analysts in the fourth quarter. They also under-performed Deutsche Bank, which said last week that revenues in its combined equities and fixed income divisions were down 22% year-on-year in the fourth quarter – at J.P. Morgan, sales and trading revenues were down 26% over the same period.
What went wrong? In fixed income, J.P. M. blamed “low volatility and tighter credit spreads against a strong prior year quarter”. In equities, it blamed a $143m loss on a margin loan to Steinhoff International Holdings. Even so, something seems awry. Costs consumed 60% of revenues at J.P. Morgan’s investment bank in the fourth quarter. The return on equity fell from 20% to 12%. J.P.M is not exactly Barclays with a return on equity of 5.9% in the third quarter, but with a drop of that magnitude it could be soon.
Only J.P.M’s investment bankers did better than expected. However, they couldn’t offset the problems in the trading business. Profits at J.P. Morgan’s corporate and investment bank were down 32% in the third quarter – a reduction of $1.1bn. In the circumstances, the $143m Steinhoff loan loss looks like the least of J.P. Morgan’s problems.
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