J.P. Morgan (NYSE:JPM): Passing Funding Costs to Borrowers

At a recent conference for investors in J.P. Morgan Chase (NYSE:JPM), Jes Staley, investment bank chief executive officer at the company, talked of concerns over the increasing cost of fixed income trading, whereby he said if increased regulations result in costs cutting into profits, those costs could be passed on to borrowers.

This is part of the problem with regulations, as lawmakers attempt to assuage consumer concerns, they end up hurting consumers more by making new laws which cost more for a bank to do business, and those costs will ultimately always be passed onto the customer in order for profits to remain on track.

Even if no other regulations are introduced and put into law, trading margins from fixed income investments are declining, and so banks are looking to other sectors to make up for it, along with the strategy of increasing borrowing costs as part of the fix.

That wouldn’t deal with the problem of growth though, and so Staley added that some of the other areas the bank is looking into in that regard are commodities trading as well as emerging markets.

Staley set at the conference that the original target of 17 percent return on equity still stands, and the company should be able to come very close to that figure.

The addition of RBS Sempra will give a nice return for the bank, as their commodity desk will have a nice bump, along with profits. Over the short term that will add to earnings nicely, and over the long term should have great growth prospects.

Even if RBS Sempra weren’t to grow it would add a lot to the bottom line of J.P. Morgan just by adding it to the company, and since it’s operating in a commodity bull market, which will resume, and in some sectors is already resuming, it should end up being a good addition to the investment banking side of their business.

Staley also addressed the historic practices of Chase, which hasn’t been especially committed to emerging markets. Now with the downward pressures on credit card profits and fixed income trading, that will become a key element of their investing strategy; now and in the future.

This is also probably referring to commodities too, as they are a big piece of the emerging market pie, and a good way to play that particular sector.

It was a good talk by Staley, as all banks need to address how they’re going to continue on with earnings with a lot of their outlets being plugged up by new regulations, especially relating to credit cards and narrowing fixed income spreads.