LONDON – As Jamie Dimon puts the final touches on JPMorgan Chase’s latest earnings report, scheduled to be published on Friday, the bank’s own analysts are raining on his parade.
In a report on the global investment banking industry, the firm’s analysts cut right to the chase.
Many of the world’s largest investment banks are likely to offer investors paltry returns for the rest of the decade. And uncertainty caused by rising regulatory costs means investors should shy away from banks that combine complex trading activity with more mundane operations like retail banking. For the analysts, the investment advice is simple.
“We see Tier I investment banks as un-investable,” JPMorgan’s banking analysts wrote in a report to investors on Thursday. “The viability of running a global Tier I investment bank business as part of a universal banking business is starting to be put in question.”
The report singles out Goldman Sachs and Deutsche Bank as ones to avoid, and did not specifically say to shun JPMorgan. But the 300-page report will make for some uneasy reading for many of the firm’s senior managers.
The bank has championed its success as both a retail and investment bank, and has continued to report strong earnings during the financial crisis, despite a recent $6 billion trading loss from a bad bet on complex derivatives. (To avoid conflicts of interest, banks like JPMorgan have kept their analysts separate from their investment banking operations).
A spokesman for JPMorgan declined to comment.
JPMorgan’s banking analysts are wary of how a series of new, uncoordinated global banking regulation will hurt the future earnings of the world’s largest investment banks.
New capital requirements mean firms will need to hold more money in reserve to cover potential losses on risky trading activity. Concern remains over how other rules like the Dodd-Frank Act and Europe’s proposed cap on bank bonuses will be implemented. And a reduction in investment banking revenue because of the financial crisis is likely to hit firms’ bottom lines.
All told, JPMorgan analysts expect the average return on equity, a measure of firms’ profitability, for top investment banks to fall to 9.6 percent after 2015, compared with 15 percent before the new regulation comes into effect.
“Our estimate of revenue impact for global investment banks from various regulations is 8.3 percent on average,” the JPMorgan report said.
In response to the expected regulatory changes, some banks have been cutting their losses by shrinking the investment banking units and focusing on more profitable businesses. Last year, the Swiss bank UBS announced that it would cut 10,000 jobs in its investment banking operations and promote its wealth management division. Its local rival, Credit Suisse, is also looking to reduce costs and focus on its wealthy clients, while the British bank Barclays said this year that it would lay off almost 4,000 employees as part of a major reorganization.
The analysis did advise buying some of the smaller banks like UBS, Credit Suisse & Julius Baer, which are less focused on investment banking and have large wealth management businesses. But for firms with sizable investment banking divisions, the JPMorgan analysts warned that shareholders were demanding higher returns to compensate for the increased risks in the world’s financial markets.
Despite efforts to cut costs and shed risky financial liabilities from their balance sheets, banks are likely to have to increase their profits to satisfy shareholder demands, including potentially through more job losses and pay reductions, or face calls to offload the risky trading activity.
“The investment banking industry is not out of the woods yet,” the JPMorgan analysts said.