J.P. Morgan and Bank of America have both reported their fourth-quarter and full-year results today. The good news is that both banks achieved healthy increases in their profitability last year. The bad news? Employees are being squeezed, still.
This squeeze was particularly in evidence at J.P. Morgan. Profits at the corporate and investment bank (CIB) rose by an impressive 34% last year compared to 2015. However, compensation in the business fell by 5%, while headcount was trimmed by 1%. Basically, J.P. Morgan's CIB is hugely more profitable than before, but the average member of staff isn't getting a look-in.
Bank of America doesn't break out specific compensation or headcount figures in its global banking and global markets businesses. Overall, however, cost ratios in both areas were down last year while profits were up. The squeeze was particularly in evidence in global markets, where profits rose by a gigantic 58% in 2015 as costs were cut from 76% to 63% of revenues. If BofA's traders are expecting a pay increase, they will very likely be disappointed.
All eyes on fixed income trading
Historically, banks flexed compensation in line with profits, so why the disconnect? The answer is to be found in the first chart below. If J.P. Morgan and Bank of America did well in 2016, it was thanks to one business and one business alone: fixed income trading. J.P. Morgan had its best fourth quarter ever in fixed income trading in 2016, but every other business in the CIB was either flat or down.
So, why aren't fixed income traders driving pay higher for everyone? Firstly, we all know that banks aren't that generous. Secondly, fixed income traders' wonderful 2016 isn't perceived as a byproduct of their own talents, but of market events: Brexit, Trump, and the second U.S. rate rise in a decade, were seen as the catalysts rather than anything traders did themselves.
More importantly though, fixed income traders' wondrous 2016 comes after years of falling revenues and rising technology and regulatory investments. As figures from intelligence company Coalition reflect, banks largely maintained headcount in fixed income between 2009 and 2015 even as revenues in the business dwindled. 2016 was therefore payback time.
There is some good news, however. As J.P. Morgan CFO Marianne Lake, pointed out in today's call, the bank's compensation line benefited from the strength of the dollar in 2016. Sterling fell by 20% against the U.S. currency last year, enabling J.P.M. to book a saving of that magnitude in reported dollar terms even while paying its London staff flat. If a third of J.P. Morgan's CIB compensation costs are incurred in London, the implication would be that 2016's 5% cut in global CIB compensation is almost entirely down to currency effects.
Everything's fine then? Not exactly. Given the huge increase in profits, the impressive performance in fixed income and the fact the pound only plummeted in the second half, J.P. Morgan's bankers might have hoped to at least share in the currency bounty. Unfortunately that looks like very wishful thinking.
Photo credit: Brian Moynihan, CEO, Bank of America; Maria Bartiromo; Jamie Dimon, Chairman and CEO, JPMorganChase and Andrew Ross Sorkin by Financial Times is licensed under CC BY 2.0.