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JPMorgan Investment Bank Avoids Crisis, for Now (Update 2)

JPMorgan's earnings also rebut analyst's forecasts that the investment bank would contribute the smallest share of revenue to the overall bank since the fourth quarter of 2008, a time when global capital markets were nearly frozen. According to median estimates compiled by Thomson Reuters analysts expected JPMorgan to earn $23.40 billion in revenue, making managements forecast of $4.77 billion in investment banking revenue, roughly 20% of overall forecasted revenue the smallest revenue contribution by the investment bank since it nearly pushed the overall bank to a loss in the 4th quarter of 2008.

For now, the DVA boosted earnings reverses a trend of falling investment banking revenue, which accounts for between a quarter and a third of JPMorgan Chase's overall revenue and has, in post-crisis quarters, supplied up to 75% of overall profits to the second largest bank in the U.S. For JPMorgan's investment bank, which has shown quarter-over-quarter declines in revenue in 6 of the last 8 quarters, today's earnings still jeopordize expectations earlier in the year that 2011 would be better than 2010. In the first two quarters of the year revenue increased 16% and net income increased 49%.

Falling revenue and an increase in profits were driven by expense savings, mainly pay. Compensation expense as a percentage of revenue fell to 29%, from 35% in the second quarter and 38% a year earlier --overall the investment bank paid employees $1.85 billion. In the quarter, it reduced headcount by about 1,100 employees, or 4% of total workers. Barclays Capital's Goldberg wrote in his note, "as revenues decline, we would expect a commensurate decrease in expenses." Expense reductions may continue to come via a shrinking staff. After earnings were announced Dimon said that while the bank does not have a formal layoff program, he expects the investment bank to reduce headcount by about 1,000 over the next 18 months.

Investment banking fee revenue fell 46% to $1.04 billion, after growing 23% and 37% in the first and second quarters respectively when compared with 2010. In the second quarter, the investment bank posted its best quarter since earning $2.24 billion in that period two years prior. According to Dealogic, global investment banking revenue was $13.5 billion in the third quarter, the lowest level since the first quarter of 2009 and down nearly 40% from second quarter levels of $21.4 billion. The third quarter results still showed that JPMorgan led all banks in investment banking fees, taking an 8.4% overall market share. Results showed that through the first 9 months of the year, it led all banks in fees earned from debt issuance and was second in equity capital market, M&A and Loan fees earned.

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