Our Take: Cautionary Notes on JPMorgan

JPMorgan's fourth-quarter results extend a string of recent evidence affirming that optics do influence paychecks of bankers and traders. That doesn't bode well for professionals at other top-tier institutions set to release results during the coming week.

A second red flag from JPMorgan's quarter is the risk that a widely noted industry-wide slowdown in bond market business might ultimately sap demand for fixed-income sales and trading professionals, whose skills were highly sought throughout 2009.

As widely reported, JPMorgan Chase & Co. held fourth-quarter compensation expense for its investment bank division to $549 million. The figure was 80 percent below the third-quarter compensation accrual and 53 percent below the fourth quarter of 2008 (a period when compensation had already been slashed as the global downturn gathered force).

When combined with amounts accrued to pay staff during the first nine months of last year, the figure doesn't look stingy at all. Full-year compensation for JPM's investment bank staff totals a record $9.3 billion, averaging out to $378,600 per employee. Not only is that up 37 percent from 2008 - it's also comfortably above the levels reached in 2007 or 2006, before the financial crisis broke out.

What's more, banks often nudge compensation accruals downward during a year's final quarter. Many institutions including JPMorgan did so in 2008. Even in 2006, the previous record year for its investment bank, JPMorgan allocated a notably smaller share of revenue toward compensation in the fourth quarter than in that year's first nine months.

So What's Not to Like?

Nevertheless, the 2009 compensation expense tally is indeed conservative. Even in the first three quarters, while revenue soared and profit returned, the bank had held compensation expense to 38 percent of revenue - below the 40 - 50 percent range historically applied both by JPMorgan and its major rivals. Folding in the fourth-quarter numbers brings JPMorgan's investment bank compensation ratio for the full year to 33 percent.

The pullback stems at least in part from "optics" - the euphemism du jour for a firm's or an industry's need to polish its public image. "JPMorgan officials said that they needed to weight the need to reward the firm's standout performance with the need to show restraint to a public outraged over banker pay," says the New York Times. Then it adds ominously: "Wall Street firms may make similarly large adjustments."

Citigroup is slated to report early Tuesday, Morgan Stanley and Bank of America early Wednesday and Goldman Sachs on Thursday.

Fixed-Income Trading Slump

A different feature of JPMorgan's fourth-quarter report also could be a bearish near-term career signal. Results from fixed-income trading, a key profit area for JPMorgan and other big banks earlier in 2009, slowed more than analysts had expected. Fixed-income markets revenue shrank to $2.7 billion from a record $5 billion in the third quarter, the bank said, reflecting lower overall volumes and tighter spreads across products.

The dropoff likely wasn't limited to JPMorgan. It should concern banking job-seekers along with investors, because the profits banks racked up selling and trading corporate and government bonds made this one of the hottest skill sets across the industry last year. At Goldman Sachs, for instance, the fixed income, currency, and commodities trading business (FICC) generated almost half the firm's third-quarter revenue.

Through late December and into January, analysts repeatedly noted that fixed-income trading slowed in 2009's final months. Temporary calendar factors may explain the dropoff. On the other hand, it could be that previous robust activity in both bond issuance and trading satiated some of the demand that would otherwise manifest this year. Meanwhile, bid-offer spreads and price volatility - two other basic ingredients of trading profits - have come down too.

Last year's bond market revival led sell-side institutions of all sizes to launch or expand fixed-income desks. They include Jefferies & Co., Cantor Fitzgerald, Susquehanna International Group, Maxim Group and PrinceRidge Group (a high-profile launch led former UBS investment bank leaders John Costas and Michael Hutchins). Last spring Bank of America began building a Charlotte-based team to trade investment-grade debt. Recently, UBS is the latest of several large banks said to be actively hiring high-yield traders.

If trading profits don't bounce back soon, hiring will feel the pinch.