Investment banking revenue soars, pushing JPMorgan past estimates

JPMorgan Chase reported a 14% fall in fourth-quarter profit on Friday due to a slowdown in its trading arm, but a stellar performance at its investment banking unit helped the lender sail past analysts’ estimates.

The US’s largest bank, whose fortunes are often seen as a barometer of the health of the US economy, saw trading revenue — a big driver of earnings in 2020 — fall 13%, while investment banking revenue surged 28% thanks to a bumper year for deals.

Loan growth, the bank’s core business, was also up 6% on a rebounding economy, while net interest income from lending and investments in treasury securities was up 3%.

JPMorgan’s shares, up 6% in 2022, slipped 3% in trading before the opening bell on Friday as investors worried about higher expenses. During the quarter, noninterest expense jumped 11% to nearly $18bn, driven largely by higher staff compensation.

Over the past year, large US lenders benefited from higher consumer spending and a surge in deal-making driven by loose monetary policy, while their trading arms gained from exceptional volatility in financial markets.

However, soaring inflation, a potential Omicron-induced economic slowdown and trading revenues returning to normal levels are set to challenge the banking industry's growth in the coming months.

“The economy continues to do quite well despite headwinds related to the Omicron variant, inflation and supply chain bottlenecks,” JPMorgan CEO Jamie Dimon said.

“We remain optimistic on US economic growth as business sentiment is upbeat and consumers are benefiting from job and wage growth.”

The trading shortfall in the fourth quarter was cushioned by yet another strong showing at its investment bank as global mergers and acquisitions activity shattered all-time records in 2021 and pushed investment banking fees to their highest level in the first half of the year.

Much of the boom was driven by large, cash-flush financial sponsors and corporates embarking on a dealmaking spree on the back of record-setting surges in their stocks.

During the quarter, JPMorgan maintained its position as the banking world's second-biggest provider of worldwide M&A advisory after Goldman Sachs, according to Refinitiv. The league tables rank financial services firms by the amount of M&A fees they generate.

Record profits

Overall, the lender posted a profit of $10.4bn, or $3.33 per share, in the quarter ended December 31. Analysts had estimated a profit of $3.01 per share, according to Refinitiv data.

Revenue remained nearly flat at $30.3bn. The bank’s earnings were also buoyed by reserve releases of $1.8bn.

For the full-year, it posted record profits and revenue, helped large by reserve takedowns.

During the quarter, JPMorgan took down more funds that it had set side during the height of the pandemic in anticipation of an expected wave of loan defaults.

But that didn't happen, thanks to a consumer-friendly monetary policy and government stimulus cheques that buoyed consumer spending, allowing banks to release billions from their loan-loss reserve.

Fixed income trading revenue fell 16% to $3.3bn, while equity markets revenue dipped 2% to $2bn.

Its consumer and business banking unit reported a 7% growth in revenue, driven by higher asset management fees and a growth in the number of transactions from customers. Like other large lenders, JPMorgan is expected to benefit from the upcoming interest rate hikes in the coming quarters.

Citigroup will report results later on Friday. Wells Fargo reported an 86% jump in fourth-quarter profit on Friday, propped up by gains from the sale of its corporate trust and asset management businesses.

Goldman Sachs, Wall Street’s premier investment bank, will report earnings on Tuesday, while Morgan Stanley and Bank of America round out the earnings season on Wednesday.

Reuters