Regulatory and litigation costs are likely to continue weighing on profits, but the big Wall Street firms should be benefiting from recent market strength, suggests Fitch Ratings in a new report.
The rating agency says that it expects the operating performance of the global trading and universal banks to have benefited in the first quarter from “a seasonally stronger quarter and solid capital market activities”, which should bolster their underlying profitability.
However, Fitchs also observes that headwinds for profitability in coming quarters could emerge from a weaker outlook for economic growth, particularly in Europe, as well as continued litigation and regulatory costs. Indeed, it notes that overall operating profitability improved for these firms in fiscal 2012, but that significant provisions for litigation at many banks dented net income.
Looking ahead, Fitch suggests that some of these negative headwinds should be mitigated by better performance in several securities businesses, as equity markets are high and some fixed income segments are showing good volumes.
Yet, given the uncertain earnings outlook for capital market activities, it also expects continued cost reduction to remain important for all banks in 2013. “Staff reduction and changes to staff remuneration policies should help contain operating expenses,” it says. And, “further charges and provisions related to regulatory investigations and litigation-related costs are likely to remain a burden in 2013.”
Fitch also says it expects that the big banks will continue to concentrate on building capital buffers in 2013 after improvements in 2012. It says it expects them to “make steady progress towards reaching sound capital ratio requirements based on a risk-weighted basis but also on a non-weighted balance sheet leverage measure.”