JPMorgan Chase & Co., the largest U.S. bank by assets and the top investment bank by fees, is questioning the so-called universal bank model’s future.
Top-tier investment banks are “uninvestable at this point with a risk of spinoff from universal banks,” JPMorgan analysts led by London-based Kian Abouhossein wrote in a research note today. They cited potential rule changes and curbs on capital and funding.
Investors should avoid Goldman Sachs Group Inc., once the world’s most profitable securities firm, and Deutsche Bank AG, Germany’s largest bank, because of pressure on earnings and the unknown impact of new regulations, according to the report. Both firms rank among the biggest sales and trading rivals for New York-based JPMorgan, which isn’t mentioned in the report. The bank is scheduled to report first-quarter results tomorrow.
Instead, the analysts favor UBS AG and Credit Suisse Group AG, Switzerland’s first and second-largest banks, and New York-based Morgan Stanley, owner of the world’s biggest brokerage, because of their restructuring potential and ability to release capital.
Investment-banking revenue will continue at 2005 and 2006 levels and will be led by fixed-income, currencies and commodities, which will account for half of the industry’s sales by 2015, JPMorgan’s analysts said.
Second-tier operators in that business, including Morgan Stanley, Credit Suisse, UBS and Royal Bank of Scotland Group Plc, will have to restructure further because they lack scale, the analysts wrote. Goldman Sachs, Barclays Plc, Deutsche Bank, Citigroup Inc. and Bank of America Corp. should gain market share, according to the note.
Investment-banking revenue won’t be the main driver of return on equity, a key measure of profitability, and 2015 sales are expected to remain 31 percent below the 2009 peak, the analysts wrote.
The Dodd-Frank Act in the U.S. and the Markets in Financial Instruments Directive II in Europe may lead to a drop in projected return on equity in 2015 to 9.6 percent from an estimated 15 percent, the analysts wrote. The largest impact may be on the FICC industry, according to JPMorgan.
In a worst-case scenario, if regulators were to require local funding for local operations, universal banks with leading investment banks may have to restructure and spin off their securities businesses so they can tap funding as stand-alone businesses, the analysts wrote.
“The viability of running a global Tier 1 IB business as part of a universal banking business is starting to be put in question,” the analysts wrote, referring to the investment banking business.