Investment bankers are waiting for the ax to fall

A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., July 13, 2022.

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NEW YORK, July 14 (Reuters Breakingviews) – Bankers who steered Wall Street’s profits during the darkest days of Covid-19 now find themselves in a tough spot. JPMorgan and Morgan Stanley reported big drops in their trading revenue for the second quarter of the year, and rivals are likely to show the same Read more . Fees have been cut in half from the previous year and the trade boost to offset them is not reliable. Banks are not yet talking about layoffs, but such painful compromises seem inevitable.

Until the Federal Reserve began to pump the brakes on the US economy, the traders were living on a shoestring. Morgan Stanley’s advisors and underwriters brought in $10.3 billion in 2021, up from $5.7 billion in 2019. Annualized fees for that quarter would have yielded a paltry $4.3 billion. It’s a similar story at JPMorgan, where the rate of $6.6 billion in annual investment banking revenue paled to $7.6 billion in 2019.

So far, the decline has been more than offset by buoyant markets. Equity and bond trading income rose 15% at JPMorgan in the second quarter, year-on-year, and more than 20% at Morgan Stanley, riding on shrunken deal fees. Commercial and investment banking are located in the same departments of both firms. But the income derived from the transfer of securities is likely to return to about where it was, especially as volatility in the bond market subsides.

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Even if things just get back to normal, investors have tougher expectations about how profitable banks should be. Expenses ate up just 49% of JPMorgan’s investment bank revenue last year, far less than the 56% reported in 2019. Chief Executive Jamie Dimon said he expected margins to rise from pre-Covid levels, as did the boss of Morgan Stanley James Gorman. And it’s getting more and more expensive to run an investment bank. Morgan Stanley expects to pay a $200 million fine because its bankers used unapproved personal devices. Policing good behavior costs money. JPMorgan’s investment bank headcount is now close to 70,000, up from just over 60,000 at the end of 2019.

Banks may be nice even if things don’t improve. With other parts of the business doing well, there is still plenty to do. JPMorgan raised its estimate of how much it will make in interest on its lending activities on Thursday. Morgan Stanley has a rich business that still generates a steady profit. But those divisions are unlikely to want to subsidize fellow dealmakers for long, despite the rainmakers’ efforts in happier times.

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JPMorgan and Morgan Stanley reported big year-over-year declines in transaction fee income for the second quarter of 2022 as mergers, equity and bond issuance dried up. Trading revenue rose strongly at both Wall Street firms.

JPMorgan’s quarterly investment banking fees of $1.7 billion were 54% lower than a year earlier. Its securities trading revenue rose 15% to $7.8 billion. Morgan Stanley’s transaction fees fell 55% to $1.1 billion, while trading revenue rose about 20% to $5.5 billion.

Both companies missed analysts’ earnings expectations. JPMorgan reported $2.76 earnings per share, compared with Refinitiv’s estimate of $2.90. Morgan Stanley reported $1.39 in earnings per share, compared with estimates of $1.54.

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Editing by Lauren Silva Laughlin and Amanda Gomez

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