JPMorgan Says Credit, Swaps Among Trading-Revenue Leaders

JPMorgan Chase & Co. signage is displayed at a bank branch in New York. Photographer: Robert Caplin/Bloomberg

JPMorgan Chase & Co. said interest-rate swaps and credit are among the biggest sources of revenue in its trading businesses, as it broke with most U.S. rivals by releasing a breakdown typically kept secret.

JPMorgan generates $375 million from credit trading in a “typical quarter” and $350 million each from interest-rate swaps and foreign-exchange spot and futures trading, the New York-based bank said today in a presentation to investors. Cash equities produces about $325 million, while the bank gets $300 million a quarter from asset-backed securities.

While some European banks describe revenue from large units within their trading divisions, U.S. banks rarely quantify the makeup of their businesses, which generate about a quarter of total revenue at the five largest Wall Street banks. JPMorgan reported $20.2 billion in 2011 trading revenue, which on its own would make it bigger than U.S. Steel Corp. and Capital One Financial Corp.

“They are pulling up the hem of their skirt so we can see a bit more leg,” said Gary Townsend, a founder of Hill-Townsend LLC in Chevy Chase, Maryland, which owns shares of JPMorgan. “They want to make sure the diversity of these operations is well understood.”

Net Income Target

Jes Staley, chief executive officer of JPMorgan’s investment bank, said the bank provided the disclosure in order to show the breadth of the businesses that contributed to market share gains. The firm’s 17 percent market share in fixed-income trading is probably a Wall Street record, he said. The trading-revenue breakdown was included in slides accompanying his presentation.

JPMorgan’s investment bank is still targeting a 17 percent return on equity, a measure of profitability, the documents show. The unit had $467 billion of risk-weighted assets under Basel 3 as of the fourth quarter and plans to cut that to $413 billion by the end of this year, giving the division a 9.5 percent Tier 1 common ratio.

The bank seeks to eventually produce total net income of about $24 billion, compared with a record $19 billion last year, Chief Financial Officer Doug Braunstein said today in a separate presentation, without specifying a target date.

Revenue Per Trade

While less than 0.2 percent of all client trades in the fixed-income business produced more than $500,000 per transaction, those accounted for about 25 percent of total trading revenue. About 98 percent of client trades produced less than $50,000 per trade in 2011, according to Staley’s presentation.

Equity swaps and options, which produce about $200 million a quarter, had the highest revenue-per-trade of the products listed, at $30,000. Interest-rate swaps produced $12,000 per transaction, with about 30,000 trades per quarter. Foreign-exchange spot and forwards generated $70 per trade, while North American cash equities charged about 1.5 cents per share.

The bank’s description of high-volume products didn’t account for all of its trading revenue. JPMorgan reported an average of $3.8 billion from trading in fixed-income products, currencies and commodities, and $1.2 billion from equities over the last four quarters. The product revenue listed in the presentation totaled $2.3 billion in fixed-income and $675 million in equities.

Staley said the disclosure highlighted “about 70 percent” of trading revenue. It excluded revenue tied to trading with other banks, and also didn’t include other areas, such as structured products, prime brokerage, and net interest income, he said.

Volcker Rule

JPMorgan’s disclosure comes as banks say the proposed U.S. Volcker rule, which seeks to bar banks from making bets with their own money, threatens market-making operations and could hurt liquidity in the marketplace. The breakdown is probably aimed at informing regulators and may prompt similar moves from competitors, Townsend said.

“We’ve always had an idea as to what their product set is, but it would be interesting to get more information that would help make clear how penetrating JPMorgan is in a particular product area compared to others,” Townsend said. “Maybe we’ll get a better sense of that as time goes on.”

JPMorgan has about 16,000 clients in its markets business, according to the presentation. Asset managers accounted for 29 percent of 2011 trading revenue, while hedge funds provided 23 percent and banks 16 percent. More than half of trading revenue came from North America, with one-third coming from the Europe, Middle East and Africa region, and 10 percent coming from Asia.

The investment bank employs 2,500 salespeople and 2,000 traders over more than 110 trading desks, the company said. It also has 2,000 bankers, 800 research analysts, 4,000 control and risk employees and 13,000 people working on technology and operations, it said.


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