This division of JPMorgan Chase will likely perform better than expected in 2022

JPMorgan Chase (JPM -0.93% ), the largest bank by assets in the United States, recently kicked off earnings season, reporting mixed results, with earnings missing analyst estimates and revenue exceeding them. Bank profits are expected to normalize in the first quarter of the year as most banks have finished releasing previously stored reserve capital to cover pandemic-induced loan losses that never materialized.

The paycheck protection program (PPP) loan boost is also largely realized. Many contradictory factors, such as rising interest rates, credit normalization, inflation and Russia’s continued invasion of Ukraine, could continue to make earnings unpredictable this year. However, one division of JPMorgan Chase that looks set to perform better than originally expected this year is corporate and investment banking (CIB). Here’s why.

Image source: Getty Images.

Volatile markets help CIB

JPMorgan’s CIB generated about $13.5 billion in revenue in the first quarter of this year, down about $1.1 billion from the remarkable first quarter of 2021, but up nearly $2 billion. dollars from the previous quarter.

When the pandemic began, capital markets, which tend to fare better in times of volatility, thrived on higher trading volumes of stocks and bonds. Companies have also taken advantage of more favorable market conditions and the ultra-low rate environment at times in 2020 and 2021 to raise debt and equity for which banks like JPMorgan serve as underwriters.

While this activity cooled later in 2021, deal-making picked up, fueling banks’ profits in their mergers and acquisitions (M&A) advisory business. Investors and analysts are bracing for a slowdown in trade as the world normalizes, but soaring inflation, the Federal Reserve’s rapidly changing monetary outlook, rising bond yields and the continued invasion of l Ukraine by Russia have created more volatility, pushing back this normalization.

Revenue from JPMorgan’s Fixed Income, Currencies and Commodities (FICC) trading unit, which assists clients with various bond transactions, surged in the first quarter due to this increased volatility.

JPMorgan Chase FICC earnings.

Data source: JPMorgan Chase. Table by author.

Revenue for the quarter of nearly $5.7 billion was slightly below the extraordinary levels seen in the first quarter of 2021. JPMorgan Chase Chief Financial Officer Jeremy Barnum attributed the success to “currency growth and emerging markets and commodities on high client activity in a volatile market.”

JPMorgan’s other capital markets sub-unit, Equity Markets – which facilitates the buying and selling of equity instruments, such as common stocks, exchange-traded funds and various derivatives, to institutional clients – also had a good quarter.

JPMorgan Chase stock market earnings.

Data source: JPMorgan Chase. Table by author.

Equity market revenue exceeded $3 billion in the quarter, following the same trend in the FICC, in which it was somewhat lighter than equity market revenue in the first quarter of 2021, which was again high . Barnum attributed the strong equity market activity to “robust” client activity in derivatives and cash and said the bank’s prime brokerage business, which essentially acts as a brokerage for large institutions, is strong, with client balances close to record levels.

One area of ​​CIB that has struggled a lot, however, is investment banking, which includes M&A advisory and equity and debt underwriting. The struggles come as no surprise, as volatile markets and the war in Ukraine have brought mergers and acquisitions and initial public offerings (IPOs) to a screeching halt.

According to S&P Global Market Intelligence, global M&A and equity and fixed-income raising transactions between January 1 and March 14, 2022 hit their lowest level for this period in five years. The results can be seen in JPMorgan’s investment banking fees, which fell significantly in the first quarter.

JPMorgan Chase investment banking fees.

Data source: JPMorgan Chase. Table by author.

Interestingly, Barnum said M&A advisory fees hit an all-time high, largely due to deals announced in 2021 that have now closed. But debt underwriting costs were down 20% and equity underwriting costs were down 76% year over year.

What does the rest of the year have in store for us?

There are a lot of factors at play here. The good news for fixed income and equity trading is that JPMorgan CEO Jamie Dimon said, “I can’t foresee any scenario where you won’t have a lot of market volatility going forward. coming.” The downside is that investment banking fees could stay lower, with a lack of deals in early 2022 potentially hurting advisory activity in the later quarters of this year. While IPO activity may pick up again, it’s hard to know at this time.

Barnum said the bank never expected trading to return to pre-pandemic levels due to organic growth and market share gains made during the pandemic. Many experts have also said that the size of these markets has increased. Barnum added that the Fed raising interest rates and shrinking its balance sheet will also create volatility, which will help trading revenue.

Ultimately, equity and fixed income trading is doing better than expected, while investment banking is struggling but may pick up later this year if conditions improve. On a net-to-net basis, I expect CIB’s revenue to be better than initially thought this year.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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