Ten important implications of yesterday's results from JPMorgan and Goldman Sachs
Whilst we've already touched upon the pay disappointment at Goldman Sachs and the pay obfuscation at JPMorgan, several other issues were raised by yesterday's results and their associated investor calls. This is what you need to know.
1. Litigation and regulatory expenses are starting to bite. Hiring and pay could fall because of it
In the fourth quarter of 2012, Goldman experienced a self-described "significant" increase in non-compensation expenses, which were up $200m on the third quarter. The bank said the increase was mostly down to litigation and regulatory provisions.
This is bad to the extent that all banks are struggling to boost their return on equity. The higher that non-compensation expenses go, the more that compensation expenses and headcount will be squeezed.
2. Banks were far more profitable in the fourth quarter than they were in 2011, but were still far less profitable than they used to be
Compared to 2011, JPMorgan and Goldman's results for 2012 looked pretty good. The Financial Times points out that JPMorgan made $1.39 per share in the fourth quarter, up 54% on the same period of 2011. Goldman made $5.60, more than three times as much as it did in the fourth quarter of 2011.
However, as Financial News columnist William Wright points out, this leaves Goldman less than half as profitable as it was in 2009.
3. 2012 ended very well for M&A bankers, who could benefit from continued good fortune in 2013
Now is not the time to be making M&A bankers redundant. Both Goldman Sachs and JPMorgan ended 2012 with strong increases in M&A revenues (up 8% year-on-year in the final quarter at Goldman and up 17% at Citigroup).
Deutsche Bank analysts are predicting that 2013 will be a good year for M&A professionals. The final quarter of 2012 suggests they may be right.
4. 2012 was a massive year for debt capital markets (DCM) bankers, but this may not persist
2012 was the year to be working in debt capital markets. Goldman Sachs' DCM revenues rose 53% last year; JPMorgan's rose 143%. Goldman's DCM revenues were the highest they've been since 2007. All things being equal, debt capital markets bankers should keep their jobs in 2013 and be paid handsomely for their work last year.
Unfortunately, all things are not equal. As the Financial Times' Lex column points out this morning, last year's DCM boom was partly due to a rush of work as corporates sought to refinance at lower interest rates.
"Eventually there will be no one left to refinance, leaving the banks earning low interest margins and little fee income," says the Financial Times.
5. People worked hard last year, but they will not get paid
A repetitive meme in yesterday's analyst calls was the fact that banks don't need to pay their staff as much now that demand for bankers has waned. The 2012 compensation ratio at Goldman Sachs was 37.9%. At JPMorgan, Jamie Dimon said the investment banking compensation ratio was just 35%.
Once upon a time, banks used to devote 50% of revenues to compensation. Never again.
6. No one may be hiring much, but Goldman Sachs bankers can still walk into any job they like
Despite cutting its compensation ratio (ie. compensation as a percentage of revenues) from 42% in 2011, Goldman actually increased pay per head by 9% last year.
Harvey Schwartz, Goldman's new CFO, said that this was necessary because Goldman bankers are still very hot. "Even as capacity has been leaving the industry, there's been a huge demand for Goldman Sachs people," he said during yesterday's call. "The competitive dynamic in aggregate may feel much better, but very talented people at Goldman Sachs are still very attractive," he added.
7. There are no immediate plans to make additional redundancies at Goldman Sachs
Last year, Goldman trimmed 900 people from its headcount. Since 2010, it's cut headcount by 10%. There are no immediate plans to make further reductions, although Schwartz didn't actually rule them out. "We feel pretty well positioned," he said (a few times), adding that there are no plans one or another to change headcount at this stage and that any changes will be driven "bottom up by the business" in 2013.
8. Analysts are starting to query banks' investments in Asia
We've noted before that Asia doesn't exactly seem to be coming through for banks - from either a revenue or profit perspective. Morgan Stanley seems to be retrenching a little from the region and said to be is cutting 15% of its Asian investment banking jobs, compared to cuts of 6% elsewhere. Asia's failure to deliver was confirmed by yesterday's results: JPMorgan's Asian corporate and investment banking revenues fell 11% last year (versus a fall of only 4% in Europe/Middle East/Africa).
Analysts are starting to take note. Christopher Wheeler, an analyst for Mediobanca, asked Harvey Schwartz if Goldman might possibly have 'over-licked the pudding' in Asia, and whether it might be considering pulling back.
The good news for Goldman's Asian bankers is that Schwartz said no, that Goldman was "comfortable" with its Asian investment - it hasn't over-licked the pudding for the moment.
9. Goldman had a much better year in 2012 than JPMorgan
Last year, investment banking revenues at Goldman Sachs (sales and trading and capital markets, excluding asset management revenues) rose 21%. At JPMorgan revenues in comparable business areas rose 2%.
10. There was no mention of growth areas or hiring
Back in the old days, the end of year analyst call would have been the chance to talk about areas of strategic focus for 2013. Not any more. Neither Goldman nor JPMorgan mentioned plans to build their businesses in 2013. Harvey Schwartz said repetitively that the lack of visibility on regulation is an issue.