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JP Morgan Predicted a Fall in Profits for Investment Banks This Year

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February 18
4:42 AM 2016

JP Morgan analysts predicted that investment banks are likely to suffer a fall in profits this year. The profit fall is due to market disturbances that would create a challenging economic environment, which in turn would cause a significant decrease in trades and deals.

Analysts elaborated the factors that contributed to the fall in earnings and revenues, as quoted by Telegraph. "We see earnings at risk in a challenging credit trading environment, low level of deal flow and lower equity markets with expectations of a stabilization leading to lower market activity as witnessed historically post sell-off," analysts stated. The analysts also highlighted some regional issues such as the China economic slowdown and weakness in the eurozone to have negative effects on global markets.

The analysts with JP Morgan cut their estimation on average earnings for investment banks this year by 20 percent. They also projected that the fall will be experienced by investment banks worldwide. However, the dynamics remain that some regions would experience more risks than others. The analysts have upgraded their ratings for Wall Street banks, such as Morgan Stanley and Goldman Sachs. The higher rating is due to comparison with European investment banks, whereas most of them had not hack back on certain contributing aspects, such as fixed income trading. Deutsche Bank AG is also listed as a top pick among global investment banks with no liquidity or funding concerns regarding the bank. On the contrary, the ratings downgraded Zurich bank Credit Suisse.

In addition to average earnings, JP Morgan analysts also added that investment banks worldwide are predicted to suffer in terms of revenues. The analysts slashed investment banks revenues estimation by 21 percent for this year. However, analysts noted that the significant decline would not be massive enough to endanger businesses.

City A.M noted the analysts statement on what the predictions mean. "Our earnings cuts for 2016 also incorporate our view that if there is market normalization, it could be followed by a period of lower market activity as we have witnessed in past sell-offs, thus impacting IB revenues," analysts stated.

The research conducted by JP Morgan analysts, however, shows that global investment banks would experience a revenues growth for 2017. The analysts estimates that investment banks could experience up to 7 percent growth in revenues, as reported by Reuters.

Challenging economic markets, low level of deal flow, lower equity markets, also economic issues on some regions contributed to the estimation that global investment banks would suffer a fall in profits this year. Average earnings are estimated to be down by 20 percent and revenues by 21 percent. However, 2017 is predicted to bring revenues growth.

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