JPMorgan's Relationship With Europe: It's Complicated
LONDON (
) --
JPMorgan's
(JPM) - Get Report
relationship status with Europe: It's complicated.
On Monday, the New York-based banking giant said it has acquired Lehman Brothers' former headquarters in London for £495 million ($769 million). It seemed like a coup in JPMorgan's long-running battle to establish its own European investment banking H.Q. Yet whether this news is a scaled-back version of its earlier plans or a signal that JPMorgan is diving back into a mature market where it's lost some share is yet to be seen.
25 Bank Street, Canary Wharf, London |
Monday's announcement related to two purchases, one building at 25 Bank Street in Canary Wharf, where Lehman had once held court, as well as 60 Victoria Embankment, which JPMorgan has been leasing for nearly a decade. The moves will consolidate JPMorgan's European operations into two central locations, rather than multiple offices throughout the city, as they are currently situated.
Chairman and CEO Jamie Dimon said the move signaled JPMorgan's "continued commitment to London as one of the world's most important financial centres." Jes Staley, who heads the firm's investment bank, said it will help JPMorgan "maintain our strong position in the region."
London's City minister, Mark Hoban, said the agreement "demonstrates the long-term commitment of JP Morgan to London and will help to ensure the City's position as the pre-eminent global financial centre."
Looking at the numbers year-to-date seem to tell a different story, though. During the first nine months of 2010, operations in Europe, the Middle East and Africa accounted for less than 30% of JPMorgan's investment banking revenue, vs. 35% last year and 63% in 2008. While revenue from that division climbed in 2008 and 2009 despite financial and economic headwinds, this year it has slumped 29% year-to-date, to $5.9 billion from $8.3 billion.
So far this year, JPMorgan ranks as No. 2 in European investment banking revenue, with 5.8% of the market, according to Dealogic. That's down significantly from 2009, when JPMorgan ranked No. 1 with 8.2% share of activity in the space.
And though JPMorgan paid $1.6 billion for RBS Sempra's London-based global commodities business earlier this year, the deal seemed more like a play on energy than a play on Europe. JPMorgan seemed more interested in RBS Sempra's global reach and its commodities conduits and storage facilities than it did with the headquarters location. Jobs that overlapped with JPMorgan's U.S. team - or were deemed unnecessary, due to new financial reform restrictions - were cut.
Monday's headquarters announcement also appeared, at first glance, to be yet another downsizing of previous plans.
JPMorgan first inked a deal in 2007 to develop a site near the London Wall called St. Alphage House. After disagreements and drama with London's financial capital, the City of London, and a real-estate developer called Hammerson, JPMorgan walked away from that agreement.
The following year, JPMorgan paid another developer, Canary Wharf Group, £237 million ($365 million) for a separate initiative known as Riverside South. JPMorgan was granted a 999-year lease to develop the site and committed to investing tens of millions of additional funds.
The ultimate cost of building and developing Riverside South was estimated at north of $1 billion. JPMorgan has already spent a good chunk of change developing the space, but hinted in its annual report that it might walk away from that deal, too.
JPMorgan said it had deferred the start of its "main construction" until October because it was "reconsidering its occupancy options." It also said it had downsized the agreement to 1.7 million square feet and four trading floors from 1.9 million square feet and five trading floors.
The 25 Bank Street building is even smaller, with just over 1 million square feet, which will house all of JPMorgan's investment banking operations, starting in 2012.
On Monday, the firm said it wasn't abandoning the Riverside South site and would continue to develop it "for future use," without specifying financial information. A spokesman did not immediately respond to questions regarding the arrangement.
Canary Wharf said design and construction work would resume "immediately to bring the development to street level." Its CEO George Iacobescu called the decision "very good news for London and for Canary Wharf."
Dimon and other executives have also insisted that the bank is strongly committed to building out its European operations - pointing out in Monday's press release, for instance, that the company's founder, J. Pierpont Morgan, started his career in London and the firm has been in the U.K. "for more than a century." Dimon also
pledged support to Europe in an extensive interview with the Italian newspaper
Il Sole 24 Ore
earlier this month while visiting Rome, as JPMorgan began new global banking operations in Italy.
But the numbers don't lie: JPMorgan's European business has been shrinking, and taking a smaller slice of its overall revenue pie, throughout 2010. And with mature markets like the U.S. and Europe going through a long-running slowdown, it's become even more evident to global banks based in those two markets that the growth isn't at home.
For reference, see:
Citigroup
(C) - Get Report
.
While JPMorgan has pulled back from the U.S. and Europe, its emerging markets business has continued to expand. Its exposure to such fast-growth nations - in terms of lending, trading and other operations - has soared 42% since the start of the year, to $50.4 billion as of Sept. 30.
There has also been speculation that Britain's implementation of higher taxes on financial services companies - as well as banker compensation - put a damper on JPMorgan's enthusiasm for London. Competitors like
Barclays
(BCS) - Get Report
and
HSBC
(HBC)
have threatened to move their headquarters elsewhere if England keeps it up with all the punitive taxation.
In an interview with
Fortune
this month, Dimon pooh-poohed the notion, saying that he "thought the whole tax issue was gross and unfair, but it doesn't have anything to do with it," meaning the headquarters negotiations. Still, he also indicated that JPMorgan's long-running drama with London brought to light the economics of expanding in expensive markets that are shrinking.
"We will always be in the U.K.," Dimon said, according to a Q&A
on Fortune's site. "But it did focus us on the fact we have a lot of eggs in that one basket, and that maybe we need to be thinking a little more about geographic diversification. I can't tell you what will happen, because we are negotiating. But we will take the best deal, pure and simple."
Overall, getting Lehman's headquarters seems to have been a better deal. JPMorgan can finally put all its investment bankers into an existing building that may need a little touch-up work, rather than starting from square one with a relatively new development.
But as far as JPMorgan's focus goes, the banking giant may want to let Europe in on a little secret: It's been dating China, India, South Korea, Brazil and a handful of other nations for awhile now.
-- Written by Lauren Tara LaCapra in New York
.
>To contact the writer of this article, click here:
Lauren Tara LaCapra
.
>To follow the writer on Twitter, go to
http://twitter.com/laurenlacapra
.
>To submit a news tip, send an email to:
.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.