JPMORGAN will kick off the most controversial earnings season in Wall Street’s history tomorrow when it unveils a sharp rise in pre-tax profits.
Having used the recession as an opportunity to consolidate Bear Stearns and Washington Mutual, the investment and retail banking titan is in an enviable position. Analysts forecast a rise in net income from $5.6bn (£3.5bn) in the aftermath of 2008 to around $8bn in 2009, with earnings per share in the region of $2.
JPMorgan’s numbers are underpinned by diverse revenue streams and busy corporate activity in the third quarter. The bank will set the bar for the string of full-year results to come from Citigroup, Bank of America, Goldman Sachs and Morgan Stanley over the next two weeks.
“If you were going to pick one bank that emerged from the financial crisis as the winner it would be JPMorgan,” says Rochdale Securities vice president Richard Bove. But observers anticipate a meaty challenge from Goldman Sachs, which will report an estimated $10bn pre-tax profit next Thursday with earnings per share between $20 and $22.
The picture emerging of fourth quarter trading is mixed. Bank of America and Citigroup are both tipped to reveal a heavy price for exiting Washington’s Tarp scheme. In Citi’s case it could mean a $6.4bn hit to its fourth quarter results, resulting in a total loss of $7.5bn for the three months, rather than $1.1bn. Trading across the board is thought to have been unremarkable, with lower volumes and smaller fixed income gains.
“The big risk high margin trades that Goldman and Morgan Stanley specialise in have been non-existent in the fourth quarter,” says John Grassano of Buckingham Research. “There has been a decline in big structured trades in equity and fixed income.” As a result, fourth quarter numbers for the big beasts of the investment banking jungle are anticipated to be in line with or lower than results seen in the third quarter.
For the general public, these details will be an aside. The questioning of high-profile executives including Goldman Sachs boss Lloyd Blankfein and Morgan Stanley chief executive John Mack yesterday by the Financial?Crisis Inquiry Commission was the latest dose of theatre to draw attention to the flock of bonus envelopes soon to be winging their way to bankers on both sides of the Atlantic.
Pay packages will come under intense scrutiny. Wall Street insiders interviewed by City A.M. believe the growing clamour around remuneration will lead the bulge bracket banks to cut the proportion of profits paid out from 60 per cent on average in the boom years to 40 per cent.
Given that around £60bn in global investment banking incomes were generated by the top 15 houses in 2009, many of which are based in New York, this means at least £36bn is likely to be paid out to staff – a figure which will probably rise once retail banking profits are factored in.
Doug Elliott, a former JPMorgan banker and fellow at the Brookings Institution, says: “There are going to be big bonuses. There’s huge anger about that, and I do think there’s going to be a government levy.”
Commentators such as Bove suggest Wall Street’s high fliers have themselves to blame. “Clearly they did not have a view on what was going on in the financial system or their systems were working,” he says. “They were going with the flow. The money was there, they were going to get it and they were going to use it.”
Morningstar banking analyst Jaime Peters defends banks’ rights to reward staff after a bumper year, however, arguing: “We have to pay revenue producing employees well to keep them around, and companies like Goldman Sachs and JPMorgan have made a lot of money through some very smart people.”
It has been suggested this season’s results will separate the strong – JPMorgan and Goldman Stanley – from the weak. Analysts believe dividend upgrades will be key to working out who will excel in 2010. All eyes will be on JPMorgan chief executive Jamie Dimon as hopes rise that he will announce a three or fourfold increase in the firm’s dividend shortly after the year-end results.