JP Morgan: Investment banking forecast rosy after long, hot FICC summer

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Better than average seasonal conditions over summer have prompted JP Morgan to upgrade its investment banking revenue forecast for Q3

JP Morgan’s banks analysts, led by Kian Abouhossein, had expected investment banks’ quarterly revenues to fall by 7% year-on-year, a bank spokesman confirmed, before publishing their latest note on September 22, in which they have upgraded their forecast to a 2% rise in revenues across the industry as a whole.

The analysts see Goldman Sachs as best positioned to benefit from a third quarter, where US rates and credit business, in particular, has maintained its strength from the previous quarter, with FICC revenues across the industry expected to be down just 4% from the second quarter, which they said was “better than normal seasonality”.

The JP Morgan team, however, echoed their analyst peers in noting that September, which is traditionally the strongest month of the third quarter as activity picks up after summer, will be a “key” month.

They said their revenue upgrade was driven by a “strong July and better than seasonal August and September so far”.

Alongside Goldman, the analysts expect Credit Suisse and Morgan Stanley to benefit from the quarterly market conditions, but this will not be the case at Swiss rival UBS, which “has the wrong business mix this quarter, in our view”, they said.

Goldman Sachs, Morgan Stanley, Credit Suisse and UBS declined to comment.

While FICC revenues are expected to be down 4% on the second quarter, JP Morgan’s analysts predict they will be up 26% from the third quarter of 2015, in stark contrast to equities, where “slower than normal seasonality” in both cash and derivatives business will drive an industry-wide revenue drop of 18% from the second quarter and 14% versus a year ago.

Revenues from investment banking divisions, including capital markets work and M&A advice, will likely drop by 4% year-on-year, the analysts added.

They said they preferred US investment banks to their European peers, warning that European firms still faced cost-cutting challenges as well as uncertainty in the wake of the UK’s Brexit vote, and noting that the “long-term theme” of low returns on equity for European players continued, with firms “unable to illustrate cost cutting”.

Questions over whether EU passporting will continue once the UK leaves the European Union add further uncertainty, JP Morgan said, while litigation is also “an ongoing risk” for European firms, with potential fines over residential mortgage-backed securities sales in the US “a key outstanding litigation leading to poor risk reward”.

In that area the spotlight is on Deutsche Bank, which said on September 15 that it had “no intent” to settle potential civil claims over the issuance and underwriting of RMBS “anywhere near” the $ 14 billion put forward by the US’s Department of Justice as an “opening position”.

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