JP Morgan: The Best of a Bad Banking Lot

JP Morgan: The Best of a Bad Banking Lot

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And the winner is – JP Morgan Chase (JPM)!

The competition, of course, is the race to emerge as the top investment bank for the first quarter, a race that the House of Dimon won triumphantly. It won the top spot by generating the largest share of revenue from underwriting equity deals, according to preliminary data from Dealogic, although it ceded top spot to Citigroup (C) and Goldman Sachs (GS) when it came to transaction volumes.

When it came to the debt markets, JP Morgan Chase grabbed the lead in both the number of transactions in which it was lead bookrunner, and in terms of the revenue it earned from those deals, Dealogic calculated. Not surprisingly, the giant global bank – one of the biggest post-financial crisis winners – consolidated its dominance of global capital markets by capturing 8 percent of global investment banking revenues, with Bank of America Merrill Lynch (BA) trailing behind at 6.2 percent.

Still, JP Morgan Chase’s celebrations may be somewhat muted given the decline in overall underwriting activity across the board. Whether it came to syndicated lending, debt underwriting or negotiating mergers, the pace at which transactions occurred nosedived in the first quarter. True, the stock market may have been on a tear, but investment banking income flagged significantly, according to preliminary data from Dealogic LLC, a worrying sign for profits from the like of Goldman Sachs and Morgan Stanley (MS).

Overall, global investment banking revenue in the first three months of the year was about $13.8 billion, down 31 percent from the first quarter of last year and 3 percent below fourth-quarter levels. Stock underwriting, ironically enough, saw the largest decline, with investment banks earning only $463 million from initial public offerings of stock, the lowest on record since the second quarter of 2009, a period when the markets were just beginning to recover from the depths of the recession.

Those figures don’t even include last Friday’s aborted IPO of BATS, the electronic trading franchise whose own technology woes in trading a series of stocks caused widespread snafus on the very day its own stock began trading on its own exchange. In a highly unusual move, BATS rescinded its own IPO, a blow to the company and its underwriters, a group that included Morgan Stanley, Credit Suisse (CS) and Citigroup. It seems clear that the black eye belongs to BATS itself rather than to underwriters, but the snafu may give some private companies pause when it comes to thinking about going public.

There weren’t really any bright spots for investment banking revenues during the quarter, just segments that were slightly less gloomy. For instance, while M&A revenues fell 27 percent from year-ago levels (and 29 percent below fourth-quarter levels) to $3.3 billion globally, the underwriting of debt issues worldwide earned an estimated $5.5 billion in the first quarter of 2012, calculated Dealogic.

It will be a few weeks before we are able to gauge the full impact of these declines on the earnings reported by Goldman Sachs, JP Morgan Chase, and the rest of the gang. Undoubtedly, the slump in underwriting will give additional impetus to their lobbying in favor of a liberal interpretation of the “Volcker Rule,” one that will give them as much latitude as possible to generate income from trading and other borderline activities. Certainly, the combination of such a lackluster underwriting and M&A environment, together with the rising cost of complying with all the new oversight and new rules, gives these firms a significant headwind. Most investment bankers are probably praying that the Facebook IPO is a massive success and proves to have very long coattails indeed.

Meanwhile, anyone who is thinking about investing in shares of companies who rely heavily on investment banking, it seems clear that the most solid bet is JP Morgan Chase, still the best bet to displace Goldman Sachs as the “vampire squid” of Wall Street, with a tentacle in every business likely to generate some revenue.