(Bloomberg) — Even JPMorgan Chase & Co., a Wall Street winner since the financial crisis and now the worlds biggest investment bank, is considering shrinking some trading businesses because new rules make them less profitable.
The firm is reviewing the size of capital-intensive units such as interest-rates trading, prime brokerage and its so- calleddelta-oneequities desk, according to Daniel Pinto, chief executive officer of JPMorgans corporate and investment bank. Pinto isnt necessarily looking to exit any businesses or make significant job cuts, he said in an interview.
Global investment banks such as Credit Suisse Group AG and Morgan Stanley have scaled back fixed-income trading, and Deutsche Bank AG is undertaking a review of its strategy as rules meant to make the financial system safer reduce the amount of leverage banks can use to boost returns from certain activities. JPMorgan has gained market share in trading since the financial crisis as rivals retreated.
Our scale gives us leading positions across these businesses even as others pull back, said Pinto, 52. But there are always ways to streamline things and be more efficient.
JPMorgan generated $4 billion more revenue from investment banking and trading than its next-closest competitor last year, producing $25.3 billion. Yet profitability slid, with return on equity dropping to 10 percent from 15 percent a year earlier as the unit required more capital. Now, a Federal Reserve proposal might exacerbate that trend by forcing the bank to amass more than $20 billion of additional equity.
Fixed Income
Pinto, who ran the New York-based firms fixed-income trading business before rising to the top of the investment bank in 2012, may discuss his review at JPMorgans investor day on Feb. 24. The division also will look at its mix of business in deposit-taking units like treasury services, he said.
The firm is reviewing the profitability of client relationships to more closely match resources with revenue produced by customers, and seeking ways technology can be used to cut costs, Pinto said. That may lead to changes such as pushing less-active clients to electronic platforms and written research reports instead of giving them access to salespeople and analysts, who would focus on top customers.
The effort aligns with recommendations for the industry that consulting firm McKinsey & Co. made in a report last year. It said banks should measure profitability of customers and cut off those who dont produce enough earnings. That was part of a broader plan for boosting net income at capital-markets units by 10 percent to 30 percent.
Systemic Importance
The Feds proposal would impose a 4.5 percent capital surcharge on JPMorgan, the highest of any U.S. bank and more than the 2.5 percent buffer recommended by the Financial Stability Board, a group of regulators and central bankers from the Group of 20 nations. The new rules increase the capital a bank must hold based on its systemic importance, which is raised by factors such as international deposits, derivative amounts and interconnectivity with other financial institutions.
JPMorgan CEO Jamie Dimon last month dismissed suggestions by Richard Ramsden, an analyst at Goldman Sachs Group Inc., that JPMorgan would be worth more broken up, given the expense of new capital rules. Dimon, 58, said the banks model is what customers want, and it provides significant cost savings.
Delta One
JPMorgan already has joined rivals in making changes to its trading business in response to new rules and regulatory scrutiny. The firm last year sold its physical-commodities unit and its Global Special Opportunities Group investment portfolio as part of an effort to simplify the business.
Interest-rates trading, which includes buying and selling Treasury bonds and interest-rate swaps, and prime brokerage, which features financing of hedge-fund clients, face higher capital charges under the supplementary leverage ratio. That rule forces banks to hold equity against a measure of assets that isnt weighted by their risk.
James Kenny and Troy Rohrbaugh oversee the rates business at JPMorgan, along with the foreign-exchange, commodities and emerging-markets units. Teresa Heitsenrether is the banks head of global prime brokerage.
Delta-onetrading isonearea that faces higher capital requirements because of how regulators judge the risk of losses.Delta-onedesks provide clients with strategies to hedge holdings or bet on directional moves in markets using derivatives or baskets of securities, which can be cheaper to trade than obtaining all of the stocks involved.
BRIC Focus
The bank also has made changes to its transaction-services and custody businesses, placing an emphasis on boosting profitability instead of the units historical focus on revenue growth, Pinto said. The clearing unit is being evaluated as regulatory changes lower returns in that business.
For expansion, JPMorgan is examining areas where we are not as good as we could be, he said. That includes seeking more market share in businesses such as cash equities, which the company said last year was alone among the investment banks 16 product areas in failing to rank among the top three firms.
In emerging markets, JPMorgan will focus resources on the so-called BRIC countries — Brazil, Russia, India and China — amid a broader slowdown in developing economies, he said. The units international plan hasnt changed much, he said. We would like to make continued progress in Asia.
Russia Commitment
That strategy means not withdrawing completely from Russia. Some bank employees, including at JPMorgan and Morgan Stanley, have left Moscow for London as sanctions punishing Russias incursions into Ukraine bring business to a halt, people familiar with the matter said in November.
Capital markets have seized up for Russian issuers since the annexation of Crimea in March led to U.S. and European Union sanctions against companies and Vladimir Putins inner circle. Affected banks and companies have been unable to tap the debt and equity markets, while the conflict with Ukraine has pushed yields higher for other Russian firms.
In Russia, we are going to comply with sanctions, Pinto said. We dont like to cut and run from countries that weve been in for decades, so we want to do prudent things.
