If JPMorgan Is Hurting, What Hope for Europe?

(Bloomberg Opinion) -- It’s shaping up to be another tough quarter for securities firms, the world’s biggest trading house has warned. JPMorgan Chase & Co.’s grim assessment of market conditions this year is more than a stark reminder that the wallet keeps shrinking.

The U.S. firm warned this week that it expects trading revenue to shrink by a low-teens percentage in the first quarter, even as it has been taking business away from competitors. For those European firms reeling from losses or in the midst of reorganizations – lenders like BNP Paribas SA, Societe Generale SA and Deutsche Bank AG – a further contraction in the revenue pool will be, at best, an unwelcome complication.

There don’t appear to be many places to hide. A combination of weaker client activity, a slow start in equities and tough conditions in emerging markets have dragged income lower.

Volumes fell across almost all stock-exchange traded products in February, from cash equities – down 30 percent – to interest-rate derivatives and commodity instruments, according to analysts at Berenberg.  

In mergers and capital markets the outlook is as grim. As my colleague Chris Hughes has noted, global stock sales in January and February are down almost 60 percent from the same period last year. One-off events like Brexit and the U.S. government shutdown that have dented the fee pool may not to be repeated. But even so, the 2018 fee pool of about $80 billion will probably decline by as much as 6 percent this year, according to JPMorgan investment bank chief Daniel Pinto. And there too, the biggest U.S. bank took business from rivals in 2018.

Be it because volatility is too low, or because it’s of the paralyzing variety, the investment bank revenue pot has been under pressure for years. It’s hard to see how this environment will help those firms that most need a rising tide.

Deutsche Bank is partly counting on regaining market share it lost in 2018 to grow firm-wide revenue by 4.5 percent this year and improve returns. Attracting new business as clients do less clearly isn’t impossible, but it’s not a slam dunk either.

Then there’s BNP Paribas. After losing money in derivatives in the fourth quarter and seeing trading revenue contract for seven consecutive quarters, the bank has abandoned ambitions to grow faster than peers. The French lender has pledged more cost cuts to improve profitability. Trading had normalized, the firm’s corporate and institutional banking chief said on Feb. 6, when the company announced the revised plan. Three weeks on, his assessment may be different.

As for Societe Generale, its plan is to scale back in less profitable fixed-income and currencies businesses after a torrid fourth quarter. Thousands of jobs may go in the securities business that employs about 20,000, according to Bloomberg News, and the bank has replaced the global markets head. Amid the internal uncertainty over jobs, a contracting business environment is unlikely to be helpful.

Some analysts have responded to JPMorgan’s warning by cutting capital markets estimates for Wall Street firms. In Europe, assumptions about growth in investment banking underpinning profit expectations will need to be reconsidered too.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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