A senior JPMorgan Morgan Chase & Co. executive has voiced caution on the outlook for M&A activity and defended his firm against a slew of governance issues ahead of its shareholder meeting next week.
Michael Cavanagh, the co-head of the bank's corporate and investment bank, said the firm had kicked off a solid second quarter, with trading revenue 10% to 15% ahead of the prior period but weaker than the first quarter.
The bank posted net income of $5 billion in the prior corresponding period, recent financial statements show. It topped M&A advisory tables during the first quarter, according to data provider Dealogic.
But Cavanagh said overall M&A activity had yet to rebound. "Uncertainty is still there and we have active backlogs and pipelines," he told a UBS Global Financial Services Conference in New York on Tuesday.
"Versus a year ago, the conditions for M&A are feeling better but while we had some big deals in the first quarter, we have not seen a broader pickup in the broader market," he said.
Cavanagh cited the reasons usually given for why M&A should pick up -- strong corporate cash levels and equity markets, the challenge of getting and sustaining organic growth and diminished macroeconomic uncertainties.
But, he said, "the one remaining factor is risk appetite. If you thought your way through the credit crisis you don't want to make a mistake -- so that is a counterbalance."
Yet, with all Wall Street waiting for the outcome of the bank's May 21 shareholder meeting where an advisory vote is to be taken on separating the chairman and CEO roles for JPMorgan's chief, Jamie Dimon, Cavanagh had to spend more of his talk than he might have wanted on assuaging concerns about his employer's enterprise.
The executive said risk control and compliance was a "top priority" for JPMorgan, following its $6.2 billion of trading losses from the London Whale episode, as well as an inquiry from the Federal Energy Regulatory Commission, which is alleging that the bank manipulated electricity markets.
JPMorgan has denied that Blythe Masters, who oversees the commodities arm of the bank, lied during a FERC investigation. "We'll be standing behind some of the people you have read about," Cavanagh said.
On the debate on Dimon's responsibilities, he added, "It should be for the board to decide. It makes complete sense [to maintain the status quo] when you look at three years running of record results and businesses across the board in great shape."
JPMorgan posted a 25% rise in first-quarter profit to $6.5 billion, though much of this came from releasing funds put aside for potential losses from credit cards and mortgages.
Consumer banking profit fell 12% to $2.6 billion, while corporate and investment banking profit shed 2% to $2.5 billion.
Cavanagh reiterated a target return on equity of 16% for JPMorgan, a level well above most of its peers and one that has prompted several observers to take an "if it ain't broke, don't fix it" approach to the firm's corporate governance scandals.
As an indicative measure, JPMorgan had a return on equity of 11.32% for the first quarter, as opposed to 10.69% for Goldman, Sachs & Co., 13.45% for Wells Fargo & Co. and 4.52% for Citigroup Inc. However, bank analysts caution against using these ratios for direct comparison, given the differing business mixes across banks. Before the credit crisis, ROE was often above 15% for the sector.
More broadly, Cavanagh acknowledged competitive pressure across the securities services business for banks. This is the segment that provides custody, fund accounting and administration to institutional investors, alternative asset managers, and debt and equity issuers. "All clients in financial services want the same for cheaper or more for the same price," Cavanagh said. "So it's no surprise there is a steady pressure [on returns]. You need scale and ability to drive costs lower."
The banker defended JPMorgan's capital levels. While the company used to lead its rivals, it has now fallen into the middle of the range.
The firm had Basel III Tier 1 common ratios of 8.9% at the end of the first quarter, which is well above regulatory requirements. "While we meet all the requirements, we need to have our own view about right level of capitalization for the business," he said. "We've thought about the risk profile of our business and through the crisis we never breached the 7% level."
At JPMorgan's upcoming shareholder meeting, the bank has to contend with recommendations from proxy firms Institutional Shareholders Services Inc. and Glass, Lewis & Co. LLC, which have said that investors should vote against six directors -- including the risk policy committee -- in the wake of various scandals.
But the most closely watched vote will be whether shareholders want the head man, Dimon, to keep his two hats.
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Andy Levine, an M&A partner at Jones Day in New York, believes that increased buying activity by Chinese companies will be a key driver of global M&A over the next decade. The Chinese have been big buyers of natural resources in Australia, Africa and South America, and Shuanghui International Holdings' purchase of Smithfield Foods last year was a sign of China's increased interest in U.S. companies. The deal stirred some protectionist rumblings in the U.S., but CFIUS approved the transaction, and Levine believes that decision is a positive sign for the future of Chinese M&A activity in the U.S. More video