JPMorgan Chase (JPM 0.37%), the largest bank by assets in the U.S., recently kicked off earnings season, reporting mixed results with earnings missing analyst estimates and revenue beating them. Bank earnings are expected to normalize in the first quarter of the year, as most banks are done releasing reserve capital previously stored away to cover pandemic-induced loan losses that never came to fruition.
The boost from Paycheck Protection Program (PPP) loans is largely done as well. A lot of conflicting factors, such as rising interest rates, the normalization of credit, inflation, and Russia's ongoing invasion of Ukraine, could continue to make earnings unpredictable this year. However, one division at JPMorgan Chase that looks like it may perform better than initially expected this year is the corporate and investment bank (CIB). Here's why.
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Volatile markets are helping CIB
JPMorgan's CIB generated roughly $13.5 billion of revenue in the first quarter of this year, down about $1.1 billion from the remarkable first quarter of 2021 but up nearly $2 billion from the previous quarter.
When the pandemic first started, the capital markets, which tend to do better in times of volatility, flourished on higher equities and bonds trading volumes. Companies also took advantage of friendlier market conditions and the ultra-low-rate environment at times in 2020 and 2021 to raise debt and equity for which banks like JPMorgan serve as the underwriters.
As this activity cooled later in 2021, deal-making picked up, feeding bank profits in their mergers and acquisitions (M&A) advisory business. Investors and analysts have been preparing for a slow down in trading as the world normalizes, but surging inflation, the Federal Reserve's fast-changing monetary outlook, rising bond yields, and Russia's ongoing invasion of Ukraine have created more volatility, pushing that normalization off.
Revenue in JPMorgan's fixed income, currencies, and commodities (FICC) trading unit, which assists clients with the various tradings of bonds, surged in the first quarter on this heightened volatility.
Data source: JPMorgan Chase. Chart by author.
Revenue in the quarter of nearly $5.7 billion came in just a touch lighter from the extraordinary levels seen in the first quarter of 2021. JPMorgan Chase's CFO Jeremy Barnum attributed the success to "growth in currencies and emerging markets and commodities on elevated client activity in a volatile market."
JPMorgan's other subunit of capital markets, equity markets -- which facilitates the buying and selling of equity instruments, such as common shares, exchange-traded funds, and various derivatives, to institutional clients -- also had a nice quarter.
Data source: JPMorgan Chase. Chart by author.
Revenue in equity markets topped $3 billion in the quarter, following the same trend in FICC, in which it came in a bit lighter than equity markets revenue in the first quarter of 2021, which was again elevated. Barnum attributed the strong equity market activities to "robust" client activity in derivatives and cash and said that activity in the bank's prime brokerage business, which essentially acts as a brokerage for large institutions, is strong, with client balances near all-time highs.
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Key Data Points
One area of CIB that struggled a lot, however, is investment banking, which includes M&A Advisory and equity and debt underwriting. The struggles are not a surprise, as the volatile markets and war in Ukraine have brought M&A and initial public offerings (IPOs) to a screeching halt.
According to S&P Global Market Intelligence, global M&A and equity- and fixed-income-raising transactions between Jan. 1 and March 14, 2022, came in at the lowest for that period in five years. The results can be seen in JPMorgan's investment banking fees, which dropped off significantly in Q1.
Data source: JPMorgan Chase. Chart by author.
Interestingly, Barnum said that M&A advisory fees came in at a record, largely because of deals announced in 2021 that have now closed. But debt underwriting fees were down 20%, and equity underwriting fees dropped a whopping 76% year over year.
What's in store for the rest of the year?
There are a lot of factors at play here. The good news for fixed income and equity trading is that JPMorgan's CEO Jamie Dimon said, "I cannot foresee any scenario at all where you're not going to have a lot of volatility in markets going forward." The downside is that investment banking fees could stay lower, with the lack of deals being seen in early 2022 potentially hurting the advisory business in later quarters this year. Although perhaps, IPO activity will pick up, it's hard to know right now.
Barnum said the bank never expected trading to return to pre-pandemic levels because of organic growth and market share gains made during the pandemic. Many experts have also said the size of these markets has increased. Barnum added that the Fed raising interest rates and reducing its balance sheet will also create volatility, which will help trading revenue.
Ultimately, equity and fixed-income trading is looking better than anticipated, while investment banking is struggling but perhaps will pick up later this year if conditions improve. On a net-net basis, I expect CIB revenue to come in better than initially thought this year.
