JPMorgan Chase & Co.(JPM) anticipates its Investment Bank, Asset Management and Corporate/Private Equity segments to post lower or negative revenues sequentially in the third quarter of 2011. This was stated by Mr. Jes Staley, JPMorgan’s head of investment banking, at the Barclays Global Financial Services Conference.
Mr. Staley commented that JPMorgan’s trading revenue would drop 30% in the third quarter from $5.5 billion recorded in the second quarter. The main reason behind the probable drop is the increased market volatility witnessed in August after Standard & Poor’s downgraded the U.S. credit rating. The continued sovereign debt concerns in Europe, along with worries regarding the double-dip recession in the U.S., also add to the woes.
Further, JPMorgan expects its investment banking fees to plunge in the current quarter as debt and equity offering have slowed down and there are lesser merger and acquisition (M&A) activities. According to Mr. Staley, investment banking fees would be approximately $1 billion in the third quarter compared with $1.9 billion in the prior quarter and $1.5 billion in the prior-year quarter.
JPMorgan also anticipates its Asset Management segment to post lower revenues as a result of lower equity market activities. Besides, the company’s private equity business is expected to report a loss of about $100 million, while its corporate business is likely to register modestly lower revenues.
JPMorgan will also take in to consideration additional litigation charges in the current quarter as the company tackles claims over its mortgage lending and mortgage securities businesses.
However, Mr. Staley stated that JPMorgan is not much concerned about its exposure in European loans. The company has about $14 billion of exposure in Portugal, Ireland, Italy, Greece and Spain, including loans and derivatives contracts.
Besides Mr. Staley, Morgan Stanley’s (MS) Chief Financial Officer (CFO) also commented at the same conference that even Morgan Stanley was forced to take lower risk in its trading business in the current quarter due to the market turmoil.
We believe the significant volatility in stock and bond markets are preventing the investors from taking undue risks, thereby leading to reduced trading revenues for the banks and financial institutions. Furthermore, the Basel III capital requirements and regulatory provisions of the Dodd-Frank Act would also start affecting the banks financial results in the near term.
Currently, JPMorgan retains its Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we are maintaining a long-term “Neutral” recommendation on the stock.
