April 13, 2012 7:19 pm

JPMorgan sets high benchmark for rivals

JPMorgan Chase’s investment bank bounced back from a miserable end to last year, offering hope that Goldman Sachs and Morgan Stanley will produce solid earnings growth next week.

But the bank’s advisory business recorded its worst performance in seven years after a weak first quarter for mergers and acquisitions. Revenues for the dealmaking business were $281m, the worst since the first quarter of 2005.

That is a trend that is likely to hurt the industry. The first quarter was the slowest start to a year in terms of mergers and acquisitions activity since 2004, according to Dealogic, as global activity fell 23 per cent from the first quarter of 2011.

But it also underscores how dealmaking has become marginalised. Trading produced the positive numbers and helped overall revenue in the investment bank rebound by 68 per cent to $7.3bn compared with the final three months of last year.

JPMorgan’s pay-related expenses fell. At 35 per cent, the ratio of staff remuneration to revenue was lower than previous quarters and likely to be lower than peers. However, Jamie Dimon, chief executive, suggested that lower pay for investment bankers – one of the levers that could improve shareholder return – is unlikely to be pulled much further.

On a conference call with analysts, Mr Dimon said: “You want a model [for the compensation ratio]? Your model should be 37.5 [per cent] and just leave it there.” Mr Dimon himself earned $23.1m last year, more than rivals such as Lloyd Blankfein at Goldman Sachs and John Stumpf at Wells Fargo.

Earnings from JPMorgan’s investment banking business surged 132 per cent compared with the fourth-quarter of last year, when the eurozone debt crisis caused clients to back away from turbulent markets. Net income was down 29 per cent compared with the same period last year, when investment banks around the world reported their second-best quarter in fixed income in history.

Return on equity at the investment bank was back in double digits – at 17 per cent, a level that others will covet come the end of this year’s earnings season, but still well short of the 24 per cent recorded a year ago.

JPMorgan “is still the bank that everyone else aspires to be,” said one analyst. “As usual, [it] has set a very high benchmark for peers in the coming weeks.”

JPMorgan topped the 2011 league tables for origination and advisory work, as well as so-called FICC, or fixed income, currencies and commodities, according to Coalition, an industry analysis group.

Surging bond issuance and rising market prices for credit-related products are thought to have helped JPMorgan, excluding a loss caused by movements in the firm’s own debt.

“Overall it was a solid quarter for investment banking. Given the trends in FICC, we believe this bodes well for Goldman Sachs and should be a positive read across for the remaining universal banks,” KbW analysts led by Frederick Cannon and David Konrad said in a note.

While the investment bank remains one of the biggest in the world, another trading division of JPMorgan has drawn more attention in the last few weeks. Hedge funds have complained that a member of the bank’s chief investment office, popularly referred to as “the Whale”, has been taking excessively large positions in a credit derivatives index.

The bank resisted the suggestion that the office was a secret source of proprietary risk-taking. Doug Braunstein, chief financial officer, said it was mainly used to invest the bank’s $360bn of excess deposits in “a variety of very high-grade securities” and “as part of that they hedge against downside risk”.

He rejected the idea that the office was trading for its own book in contravention of the new Volcker rule, which prohibits the activity at banks. “All those activities I’ve described are very long-term in nature and they are consistent, I think, with both the spirit and the written rules,” he said.

Additional reporting by Helen Thomas in New York

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