Speaking at the Barclays Capital Global Financial Services conference in New York today, Jes Staley, chief executive of JPMorgan Chase’s investment bank, offered some troubling insights into the havoc wreaked on bank earnings by market declines and volatility during the third quarter.
Staley told investors: “Given what we saw in August and the current run rate in September you can safely expect a decline in our market business revenues of around 30% from the second quarter to the third quarter.”
He added that, given low levels of M&A and equity capital markets activity, investment-banking revenues will be just $1 billion for the third quarter (almost half the second quarter result of $1.9 billion) and also pointed out that asset management fees are also correlated to weakening markets.
On the corporate side, the investment bank will likely report a roughly $100 million loss on private equity and will also take further litigation expenses leading to a small loss for the quarter on corporate net income.
The good news for JPMorgan is that its strong market share in the FICC business seems to be holding up and the bank has managed to make profits in these businesses from customers without relying on risky position taking. Staley says: ‘If you go back over the past 20 or 30 years the market shares of the bulge bracket banks have been pretty consistent. It’s who those banks are that has changed around a lot.”
In FICC, he says: “Coming out of the financial crisis, it looked like our market share doubled and the burning question we have asked ourselves is how sustainable that is. In our client business we have not slipped and if you look at revenue to value at risk (VaR) it’s been at historically high levels. Going into the third quarter we had not had a single losing trading day for a year.” He suggests that rather than taking risk positions to boost profits, the bank has ridden markets well by avoiding losses.
As Staley spoke, panic was spreading in European financial markets over banks. Analysts pressed him on JPMorgan Chase investment bank’s exposure to troubled European lenders.
Staley repeated earlier disclosures that the bank’s net exposure is $14 billion to Spain, Italy, Greece, Portugal and Ireland, with roughly 60% of that being to corporates and the remainder split equally between sovereigns and banks. “That is quite manageable in the context of JPMorgan’s balance sheet. We are extending credit to European banks and continue to do so. Are we immune to Europe? Not by any measure. But that exposure is manageable.”
The key question for Europe, he admits, is the difficulty of divining in advance the possible contagion affects of any disorderly default in Greece.
But Staley takes comfort from the European banks’ ability to withstand a sudden contraction in liquidity. “One of the triggers of the crisis in 2008 was when money market funds got worried about their exposure to the US investment banks and took that down quickly. This time, we have already seen an enormous contraction of money fund exposure to European banks. It’s roughly halved in 30 days. But we’ve not seen a liquidity crisis. Rather, the European banks have done a good job of getting through a reduction of access to a certain big source of funding. So I don’t see risk around funding as such a great concern.”
