Last week’s prediction has come to pass: J.P. Morgan is indeed cutting costs from its investment bank. During today’s investor presentation, the firm outlined plans for stripping out $2.8bn of expenses by 2017.
How will this happen? Mostly from ‘business simplification’ apparently. There will be no wholesale pulling out of fixed income business areas. Daniel Pinto, chief executive of J.P. Morgan’s corporate and investment bank (CIB), says he has no intention of pulling out of business areas or product lines altogether, that this is simply a route to becoming irrelevant and unprofitable. He plans instead to allocate the balance sheet “effectively”, to “optimize” the way JPM handles clients and to reduce overlaps in technology and operations,
Ostensibly this means J.P. Morgan’s front office bankers should be fairly safe. ‘Just’ $300m of the proposed CIB cost reductions will come from the front office. However, in the markets business at least, JPM staff will need to resign themselves to lower pay. Although Pinto promised to “pay for performance”, JPM is committed to cutting pay to reflect higher capital costs and a declining return on equity (RoE).
Below, are the key charts from Pinto’s presentation. Pinto said the cuts at the bank are already planned in detail: “Action by action, is already identified.”
1. J.P. Morgan’s CIB is a much better place than it used to be
2. J. P.Morgan’s markets revenues are less volatile than its competitors’ – it’s a nice stable place to work
3. Eight years ago, J.P. Morgan was a second (or third) tier bank in sales and trading
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4. Over the past four years, J.P. Morgan has been much better than everyone else in IBD
5. Over the past four years, J.P. Morgan has been much better than everyone else in fixed income sales and trading
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6. Over the past four years, J.P. Morgan has performed just the same as everyone else in equities sales and trading
7. J.P. Morgan wants to grow its equities business, still
Much of this growth is likely to come from electronic trading. E-trading volumes were up 22% in the US and 57% in EMEA between FY2013 and FY2014.
8. EMEA has been J.P. Morgan’s biggest area of growth recently
Pinto cited the UK as a particular growth area since 2010. APAC hasn’t performed as expected over the past four years, but Pinto said JPM isn’t giving up on it – growth there will come, one day.
9. Based on a strategy of client optimization, prime broking and intermediation look a bit vulnerable
J.P Morgan is battling against a surcharge concerning ‘Global Systemically Important Banks’ (GSIBs), which is due to come into effect on January 1 2016. To deal with this, Pinto says the bank plans to “optimize” across clients and product areas.
On this basis, prime broking and intermediation – both of which only have hedge funds as clients – look vulnerable to cuts. However, Pinto said the bank has no intention of culling prime brokerage – it simply intends to “optimize” it.
10. JPMorgan wants to invest in Asia and Latin America
11. JPMorgan’s credit business is weak. It wants to ‘maintain its position’ in FICC
J.P. Morgan’s credit business ranks fourth worldwide and fifth in APAC. However, there was no mention of building this out. When asked about the future of the FICC business, Pinto said he’s optimistic for the long term. Both Europe and emerging markets are expected to contribute to growth. “It’s a challenged business,” Pinto admitted, but if costs are kept low and the bank maintains its scale he said FICC could improve in future.
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12. J.P. Morgan’s rates business is not doomed
Even the rates business, which has had a tough few years, will not be jettisoned altogether. As the chart below shows, when the legacy rates portfolio is wound down, Pinto thinks the rates business could generate good returns.
13. Pay is likely to fall in J.P. Morgan’s markets business
14. Cost reductions in the investment bank will mostly come from ‘business simplification’
