China Rout Could Cut Banks’ Equities Revenue 22%, JPMorgan Says

Global investment banks may see revenue from trading stocks slide 22 percent on average in the second half of the year from the first half because of the turmoil in China, according to analysts at JPMorgan Chase & Co.

Should the market swings in China persist “it might impact the trading volumes in the second half” as clients reduce activity and the pace of new stock sales slows, analysts led by Kian Abouhossein wrote in a report on Tuesday.

Chinese stocks have been on a roller coaster over the last month as the government stepped in to prop up the market after a rout that wiped almost $4 trillion of value. Securities firms have shifted their focus to Asia to tap faster growing markets while rules that make trading debt more expensive have made the equities business more attractive.

The world’s top nine investment banks, including JPMorgan, earned $13 billion from trading equities in the first quarter, data compiled by Bloomberg Intelligence show. That made it their second-biggest revenue source after fixed income, currencies and commodities trading, the data show.

The situation is still “manageable” for investment banks as they probably don’t face losses on their inventory of structured products in China because they generally hold reserves against these and mark their relevant risk “conservatively,”according to JPMorgan.

The analysts have an overweight recommendation on shares of UBS Group AG, which generated 16 percent, the largest share, of the $8 billion of Asian equities revenue split by nine investment banks last year, JPMorgan estimates show. Those figures don’t include JPMorgan’s earnings.

Over the past month, the government has introduced unprecedented measures to revive investor confidence, including banning large shareholders from selling stakes, ordering state-run institutions to buy equities, allowing the central bank to finance stock purchases and letting more than half of companies on mainland exchanges halt trading.

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