JPMorgan and Citigroup are bluffing about scaling down in London
The UK Exchequer should be quaking in fear. Having paid $550m and $400m respectively in bonus tax last year, JPMorgan and Citigroup are making ominous noises about leaving the UK.
The Telegraph reported at the weekend that JPMorgan is 'on the verge of quitting' its plan to build new twin skyscrapers in Canary Wharf because of UK banker bashing and a lack of government support for financial services.
Meanwhile, The Times reports that John Gerspach, Citigroup's CFO, said on Friday that the bank would have a choice of paying up, or leaving the UK, if the bonus tax is repeated or further substantial tax hikes are imposed.
There are reasons not to be afraid.
1) JPMorgan is simply making excuses because its new building is too expensive
JPMorgan's planned London skyscrapers are expected to cost $3bn, which is expensive when your profits have just fallen 44% quarter on quarter. Complaining about the political climate may simply be a smokescreen to excuse the fact that the plan has become unviable, or a way of negotiating the price down further.
2) There is nowhere else to go
Yes, JPMorgan's London investment banking operations are being run more out of the US since the departure of Bill Winters, and, yes, JPMorgan aspires to double its Asia market revenues over the next three years, but this doesn't mean that it's viable to give up its London HQ and move to Asia, move back to the US, or move to new operations in the Middle East and Switzerland.
JPMorgan's Asian revenues didn't actually grow at all in the second quarter compared to the same period of 2009; as things stand, they're only 56% of revenues in EMEA. Meanwhile, Citigroup's Asian revenues fell 26% year on year (in securities and banking) in the second quarter, and are only 57% of EMEA's.
And even if Asian revenues increase further and EMEA revenues fall further, London will remain well positioned geographically between the Asian and US markets. Switzerland not withstanding, no other European country is more hospitable to financial services, and hedge funds' experience suggests staff appetite to move to Switzerland is limited.
3) Their existing commitment is huge
Gerspach admitted that pulling Citigroup out of London would, "take years."
JPMorgan has made big commitments to London since 2007, both through the purchase of Cazenove and the growth of a European prime broking business on the back of Bear Stearns. Europe clearly remains an important focus. Within Europe, alternatives to London are scarce (see 2).
Equally, most banks have built up substantial UK corporate tax credits from their losses during the downturn - to the extent that BofA was forced to writedown the assumed value of these due to coming cuts in UK corporation tax. The ability to offset future UK profits against these tax credits could keep banks in the UK for years to come.
* In a follow-up article today, the Telegraph claims that JPMorgan is also contemplating moving its back office operations out of Bournemouth and Glasgow. This looks a little more likely, with plenty of back office functions easily transferable to the likes of Singapore. However, uprooting the front office probably won't happen for the foreseeable future.
