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For avid bank watchers, the news that trading revenues at the biggest U.S. investment banks fell by 73% from one year ago probably did not elicit much surprise. Investment banking and the mergers and acquisitions business has slowed precipitously since the financial meltdown, and articles abound detailing how the once mighty are now scrounging and scraping for the type of M&A work once considered beneath them, as well as planned cuts to investment banking staff. To add insult to injury, a new report from the Office of the Comptroller of the Currency shows just how much of an effect JPMorgan Chase's (NYSE: JPM ) springtime trading fiasco had on the industry.
London Whale blamed for drowning entire sector's profits
A report from the OCC highlights the $5.8 billion loss sustained by JPMorgan during Q2, even though the bank allocated a portion of the loss to the first quarter. Still, JPMorgan declared a $420 million trading loss, which pulled down everybody's averages for the year over year metric. Although over 1,330 insured financial institutions reported some measure of derivatives trading activity to the agency, the four largest banks -- JPMorgan, Bank of America (NYSE: BAC ) , Citigroup (NYSE: C ) , and Goldman Sachs (NYSE: GS ) -- dominate, representing 93% of trading activity.
The OCC takes into consideration lower client demand and typical seasonal performance in its report, but it is still astounding that JPMorgan accounted for tamping down all banks' earnings by nearly three-quarters, while constituting only 25% of the biggest contributors to the sector. JPMorgan's $420 million loss stacked up against Citi's $884 million trading revenue, Bank of America's $680 million, and Goldman's $88 million.
Though JPMorgan's huge loss dwarfs any losses the other three might have suffered, it is important to note that Goldman Sachs reported six days of trading losses for Q2, though nothing to compare to the scope of JPMorgan's loss. Morgan Stanley (NYSE: MS ) , not hefty enough to be lumped in with the big boys, disclosed 15 days of trading losses, though the company's low risk tolerance kept daily profits and losses smaller than at Goldman. Interestingly, the star here is Bank of America -- which reported no trading day losses on its 10Q form, while ratcheting up profits under new and improved management.
One Fool's take
Despite the dent the London Whale put in overall investment banks' profits, it seems clear that these institutions are planning for a new day, and not for a return to the time of huge profits. Jobs in this sector have dropped by nearly 6% from a year ago, as banks try to reduce costs while bringing in 7.5% less revenue in the first half of this year. Goldman recently reduced approximately 25 jobs in its sales and trading sections, and Citi is planning to trim up to 350 jobs before the end of the year, many of them in the trading and investment banking area.
On the positive side, the banking industry as a whole ramped up profits in Q2 by almost 21% overall from one year ago. It seems clear that the banks who will survive in the brave new world of banking will learn to adapt to, not fight, the new reality. Taking a page from B of A's book might be a good start.
These are tough times for big banks, but they won't last forever. Until the sector regains its footing, why not use the time to take an in-depth look at the most talked-about bank on the big board -- Bank of America? This report will give you details on B of A's future prospects, reasons to buy, and reasons to sell. Interested? Click here to get started.