Updated with additional information and management commentary.NEW YORK ( TheStreet) -- JPMorgan Chase's ( JPM) disappointing capital markets' revenues in the fourth quarter has lowered expectations for its peers including Citigroup ( C), Bank of America ( BAC) and Goldman Sachs ( GS) who are all set to report next week. The nation's largest bank by assets kicked off the fourth-quarter earnings season, reporting a net income of $3.7 billion or 90 cents per share on a managed basis, compared to a year-ago net income of $4.83 billion or $1.13 per share and a third quarter net income of $4.3 billion or $1.02 per share. The 23% drop in profits was led by a significant decline in its investment banking operations. Net income from investment banking operations dropped 56%, to $726 million from $1.6 billion in the previous quarter. In the year-ago-quarter, the division brought in a profit of $1.5 billion. Total revenue from investment banking and trading dipped 30% to $4.35 billion in the fourth quarter from $6.21 billion in the year- ago quarter and was down 32% from the previous quarter. In the third quarter, the division reported a revenue of $6.36 billion, including a $1.9 billion accounting gain(debit-valuation adjustment) from a fall in the market value of the firm's debt. With spreads tightening in the fourth quarter, the bank reversed some of those gains, reporting a debit-valuation pre-tax loss of $567 million. Adjusting for the DVA, revenues were flat on a sequential basis. Investment banking fees were down 39% to $1.11 billion from $1.83 billion in the year-ago quarter, but improved by 8% from the $1 billion reported in the third quarter. Debt underwriting fees and advisory income improved from the third quarter, but equity underwriting fees came in lower by 5%. Trading revenue was predictably disappointing, as volumes continued to decline in the fourth quarter. Fixed income trading revenues, normally the biggest driver of revenues for the investment banking division, came in at $2.491 billion, down 25% from the third quarter and 13% year on year. Adjusting for debt-valuation gains and losses recorded, fixed income trading fell 6% quarter-on-quarter and 9% year-on-year.
Equities trading revenues dropped 45% quarter-on-quarter and 31% year-on-year to $779 million. Excluding accounting gains and losses, equities trading revenue fell 23% sequentially and 26% on a year-on-year basis, hurt by declining volumes. Investment banking and trading revenues contributed 27% of the revenues in 2011 and more than 35% of the profit, trading being the more significant component. Still, CEO Jamie Dimon said that investors should "forget trading," which he said was a volatile business that moves up and down all the time. The business will bounce back when the economy improves, Dimon said and, "It won't be because we are geniuses, but because we stayed in the game." Instead, he said investors should be encouraged by the trends in
loan growth . JPMorgan reported a 4% growth in loan balances quarter-on-quarter, powered by business lending. Still, shares were down more than 4% on Friday trading on the poor performance of capital markets and was weighing on other bank stocks as well. JPMorgan continued to add to its headcount at the bank level, but the investment banking division contained its compensation- to- revenue ratio for the fourth quarter at 27% and the metric stood at 34% for the whole year, down slightly from 35% posted in 2010. The bank had indicated that it would stick to the 35% to 40% ratio for 2011. On an absolute basis, compensation expenses declined 37% quarter on quarter and 36% from 2010. JPMorgan laid off 616 employees from the investment banking division in the fourth quarter, bringing the total headcount to 25,999. The bank had previously said it would cut about 1,000 jobs over an 18-month period. The average compensation per employee in 2011 was $341,551, down about 8% from the previous year's average of $369,651. Markets have been expecting deep compensation cuts at the big banks as they face a difficult operating environment. So far, though, revenue declines have tended to outpace compensation cuts. That's because banks are still trying to figure out how much of the weakness is cyclical versus structural in determining their headcount reduction plans.
Currently, Wall Street's biggest players including Goldman Sachs have taken the view that it is cyclical, which means the ax tends to fall more on pay than on jobs. Still banks including Citigroup and Morgan Stanley ( MS) have announced cuts to their investment banking division in the last few quarters and the downsizing in the industry is expected to continue in 2012 as economic weakness persists. JPMorgan analysts will be focusing on management commentary for the first quarter of 2011, a seasonally strong one for universal and investment banks. JPMorgan's trading and investment banking results sets the tone for other banks due to report next week, but it is not always a perfect read-through for what to expect from its rivals. The bank managed to better its rivals in trading performance in most quarters of 2011. And while weakness in capital markets tends to affect all investment banks, performances do diverge considerably. In the third quarter of 2011, for instance, JPMorgan saw a sequential decline of 28% excluding accounting gains, compared to a 60% drop at Bank of America, according to Barclays Capital research. Citigroup saw only a 9% dip. Citigroup will be reporting on Tuesday. Analysts expect the company to report a profit of 49 cents per share on revenues of $18.54 billion. The results will include a $400 million charge related to job cuts and other one-off items. CEO Vikram Pandit had indicated that tightening credit spreads would affect revenues negatively. Goldman Sachs reports on Wednesday and will face more scrutiny as a pure-play investment bank. The company is expected to report an EPS of $1.32 per share on revenues of $6.65 billion. Investors will be paying particularly close attention to its compensation costs, as Goldman is best known for its hefty bonuses. --Written by Shanthi Bharatwaj in New York >To contact the writer of this article, click here: Shanthi Bharatwaj.
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