JP Morgan to kick-start results season and they may set the bar high, write DANIEL SCHÄFERand TRACY ALLOWAY

INVESTMENT BANKS worldwide have seen earnings bounce back in the first quarter as the reprieve from the euro zone sovereign debt crisis buoyed credit markets, but the improvement is expected to be only temporary.

A rebound in revenues from debt markets after a dire fourth quarter and cost cuts have helped investment banks to recover lost ground, with a number of them expected to reach net returns on equity above 10 per cent in the first three months of the year.

US investment bank JPMorgan will this Friday kick-start several weeks of banks reporting results, and may set the bar high.

Jason Goldberg, analyst at Barclays, says: “JPMorgan will stand out in fixed income as they tend to benefit from a flight to quality.

“They will also stand out with a more than 15 per cent return on equity in their investment bank.”

Trading in bonds experienced the biggest bounceback as clients returned to the markets after a confidence-boosting €1 trillion in three-year funding that the ECB churned out to euro zone banks in December and January.

Kian Abouhossein, analyst at JPMorgan Cazenove, says: “This quarter has clearly been helped by [the ECB’s] long-term refinancing operation.”

Analysts expect revenues in fixed income, currencies and commodities trading – which together account for about half of investment banks’ average revenues and earnings – to be double their average in the last two quarters of 2011.

But fixed-income revenues will still be up to 15 per cent lower than in the first quarter of last year, which marked the second-best first quarter in history.

The rebound from the fourth quarter will nevertheless particularly benefit those investment banks that have strong operations in fixed income, currencies and commodities trading, such as JPMorgan, Deutsche Bank, Goldman Sachs, Citigroup, and Credit Suisse.

Analysts expect Morgan Stanley and UBS to be weaker than their peers in the first quarter as their area of strength – equities trading – had a slow start.

The split between strong debt and lacklustre equity markets has already been visible in banks’ advisory fees, an area that typically accounts for a fifth to a 10th of earnings.

While bond issuance was the only bright spot, a sharp fall-off in equity issuance and tepid MA activity have reduced the overall fee pot by 6 per cent compared with the last quarter of 2011, according to data by Thomson Reuters.

Much of the trading improvement in the first quarter has already been captured by investors.

Shares of the US’s biggest banks have risen about 40 per cent since the start of the year and the FTSE banking index is up 10 per cent, outperforming the overall market by several percentage points.

Credit prices have also increased, helped in part by the Federal Reserve’s auctions of assets once owned by AIG.

Rising credit prices are expected to help boost banks’ results. Analysts at KBW say: “Although volumes improved during the latter half of the quarter, the first quarter strength is partly driven by positive marks.

“As a result, we may not see positive estimate revisions, especially for trading.”

Bank bond prices have rallied dramatically during the quarter too. That means credit or debt valuation adjustments, where banks can profit or lose money based on the performance of their own bonds, are expected to have an impact upon headline results yet again – but, as opposed to recent years, this time negatively.

But while analysts expect the increase in trading volumes to boost banks’ top lines, the fact their performance will be less obscured by “one-offs” such as the euro zone crisis could expose longer-term issues such as declining profit margins.

These could reignite the debate over the future of big investment banks as they grapple with new regulations that clip some of their historic profitmaking ability.

– (Copyright the Financial Times Limited 2012)