Investment banks' profits will be squeezed by stricter regulation, JPMorgan predicts

Tighter regulation on investment banks will force firms to cut salaries, eliminate staff and reduce capital commitments to the business, according to research from JPMorgan Chase & Co. In a series of reports issued today, JPMorgan analysts said that profits at the major firms will be hurt by regulatory changes in both the Unites States and Europe. Proposed changes are likely to limit the firms’ futures trading, force over-the-counter derivatives onto exchanges, and increase capital requirements for riskier businesses and for positions that have high counterparty risk, the analysts noted. JPMorgan cut earnings estimates for the large investment banks by an average 7%, and predicts that return on equity will fall from 15% to 11% by 2011. Earnings per share estimates for 2011 were cut to $2.07, from $2.15 for UBS AG; to $13.87, from $15.74, for Goldman Sachs Group Inc., and to $3.22, from $3.60, for Morgan Stanley. To compensate for lower profits, costs per employee will have to drop by 15% on average in 2011 compared to this year, and head count must shrink 3% in 2011, compared with the second quarter of this year, the analysts said.