US investment banking makes a comeback

The “last man standing” strategies could be paying off.

Third-quarter results last week from the trading and advisory units of JPMorgan Chase and Citigroup, two of the top three banks by investment-banking revenues, suggest that more good news is likely from Goldman Sachs and Morgan Stanley, which report on Tuesday and Wednesday this week.

At JPMorgan, revenues from the corporate and investment banking unit were a record $9.5bn, boosted in particular by vibrant fixed-income markets after the Brexit vote and plenty of action in currencies. Citi, too, had a bumper quarter in bond trading, with revenues from that division up more than a third from a year earlier to $3.5bn.

For Jamie Dimon of JPMorgan and Mike Corbat of Citi, it is a measure of vindication. As second-tier banks such as UBS, Credit Suisse and Deutsche have made cuts in investment banking, beaten back in many cases by investors demanding much higher returns, the big US banks have gritted their teeth, preserving much of their staffing and infrastructure while assuring shareholders that better numbers were just around the corner.

That stance has been challenged. Executives at Goldman Sachs were taken to task by analysts in July, after four quarters in a row of subpar returns. Earlier this year the bank trimmed about 10 per cent of its staff in fixed-income sales and trading, a much bigger cull than the usual bottom 5 per cent each year, and is currently cutting about 30 per cent of its investment bankers based in Asia.

Citi has had to justify its decision to stick by the investment bank while picking apart its retail-banking business, pulling out of markets such as Japan, Brazil and Argentina and closing hundreds of branches back home.

But the patience could now be rewarded. At JPMorgan, for example, net income from the corporate and investment banking unit nudged ahead of net profits from the consumer and community banking (CCB) unit over the first nine months, marking a break from the post-crisis trend. In 2014, the gap in profits was $2.3bn in CCB’s favour; in 2015 it was $1.7bn.

The standout division at both Citi and JPMorgan was fixed-income, currencies and commodities, which bodes particularly well for Morgan Stanley. The bank has made big cuts to its FICC business in recent years, as James Gorman, chief executive, tries to rebalance towards wealth and asset management.

Still, the bank is shooting for about $1bn of revenues a quarter from its pared-down FICC business and looks likely to clear that hurdle this time, given that it has a similar mix of activities — across interest rates, foreign exchange, commodities and credit — as JPMorgan.

“The good news was that FICC strength was so broad-based,” says Devin Ryan, analyst at JMP Securities, speaking about JPMorgan. “The biggest takeaway was the health of those investment-banking businesses.”

Momentum may not last, of course. Third-quarter volumes were probably boosted by one-off effects from Brexit, notes David Konrad, an analyst at Macquarie. And the July-September period in 2015 made for some easy year-on-year comparisons. Back then, Lloyd Blankfein, Goldman’s chairman and chief executive, noted unusually thin and brittle markets as the bank missed analysts’ profit forecasts for the first time in four years.

John Gerspach, Citi’s chief financial officer, gave an outlook that was carefully hedged on Friday. Trading would probably “reflect a normal seasonal decline” in the fourth quarter, he said, but that advising companies on acquisitions and fundraising should be stable, “assuming market conditions remain favourable”.

But for now, at least, Wall Street looks a slightly more comfortable place to be than Main Street. Banks in the US continue to fret over the spillover effects of the fake-account scandal at Wells Fargo, and are urging staff in branches and call centres to focus less on pushing products.

At JPMorgan, Marianne Lake, chief financial officer, said that the bank was carrying out reviews to root out wrongdoing, as it always has done. On a call with reporters, she stressed that the bank could never have “zero defects”, and would take swift action if and when it found them. Meantime, she said, “our incentive compensation is designed for the right behaviours”.

“Banks are not sitting there waiting for the regulators; they’re doing their own reviews, making sure there’s nothing untoward,” said Joo-Yung Lee, head of the North American financial institutions group at Fitch Ratings.

But over in investment banking, the mood is generally brighter. Hence the backslapping memo from Daniel Pinto, head of JPMorgan’s corporate and investment banking unit, which went out to about 50,000 staff on Friday morning.

Following the record-breaking quarter, it was time to turn the screw.

“Given our top markets franchise, emerging markets capabilities and ability to invest in new technologies, we believe we have a tremendous opportunity to capture more and more market share in the years ahead,” he wrote. “Keep up the good work.”


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