Photographer: Michael Nagle/Bloomberg

JPMorgan Turns Bullish on Future of Global Investment Banks

  • Goldman Sachs, Morgan Stanley take top spots in firm’s ranking
  • U.S. investment banks ‘better managed than ever,’ analysts say

Four years after questioning whether global investment banks would survive the regulatory scrutiny unleashed after the financial crisis, JPMorgan Chase & Co. analysts are now singing a different tune.

Investment banks are “in better shape and better managed than ever, especially in the U.S.,” analysts led by Kian Abouhossein wrote in a note to clients Monday. “Global investment banks have made excellent progress in reducing their cost base and continue to remain focused on creating positive operating leverage.”

Firms including Goldman Sachs Group Inc. and Morgan Stanley are at the top of JPMorgan’s investment-banking pecking order, followed by Credit Suisse Group AG, UBS Group AG and Barclays Plc. U.S. investment banks are “much better positioned” compared with European and Japanese peers, the analysts said, citing progress on cost cutting and the potential for a relaxation of regulation in the U.S. JPMorgan wasn’t included in the analysis.

Read more: Key U.S. Bank Regulators Say They’re Ready to Soften Rules

Global investment banks spent the decade since the financial crisis working to meet higher capital requirements and improving compliance and risk management functions, which have crimped revenue and caused them to shrink headcount. Following a populist wave in countries around the world, investors are now betting the banks are poised to benefit from less stringent regulations and, in the U.S., an improved economic environment.

Long-Term View

Abouhossein said his group’s optimism is based on a long-term view of the investment-banking sector, rather than short-term expectations for quarterly revenue. The analysts last month told clients that second-quarter revenue at the biggest global investment banks is likely to drop from a year earlier as a rebound in fixed-income trading fizzles.

Still, investment-banking revenue not including trading will probably climb 3 percent annually from 2017 to 2019, which should help increase total revenue from the business 2 percent a year during that time, JPMorgan said. Improvements in the macroeconomic environment should boost fixed-income trading by 1 percent and equities trading should increase 2 percent, largely from industry consolidation.

The rates businesses will be the top performer in fixed income over the next two to three years, posting estimated annual growth of 7 percent, JPMorgan said. Within stock trading, derivatives are likely to outperform cash equities as changing interest rate expectations drive demand for hedging and investment products, the analysts found.

“The U.S. business is the most profitable for existing players, in our view, as it provides access to a seamless capital market, uniform regulations and a securitization market which is far more developed and functioning than Europe,” Abouhossein wrote.

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