Unlike their U.S. counterparts, Canadian banks haven’t taken advantage of the surge in financial market volatility, Fitch Ratings says.

In a report, the rating agency said the big banks’ capital markets divisions saw equity trading revenue decline by 61% year-over-year in their fiscal second quarter.

The big banks’ traders “largely failed to capitalize on record bond sales and outsized equity market volatility during their fiscal 2Q, driven by the underperformance of and higher exposure to equities and equity-linked products,” Fitch said.

Most of the banks’ capital markets businesses reported lower earnings, the report noted.

The bright spots were Bank of Nova Scotia and National Bank of Canada, which saw net income grow in their financial markets segments, Fitch said.

At the other end of the spectrum, Bank of Montreal’s capital markets division reported a quarterly net loss, Fitch noted, “as strong results in rates, [foreign exchange], commodities trading and cash equities were more than offset by declines on equity-linked notes and widening spreads.”

Fitch said that it expected the Canadian banks’ capital markets units “would take greater advantage of surging activity in both equity and debt capital markets this year, given the unprecedented monetary policy actions in the U.S. and Canada and central bank commitments to purchase corporate debt securities.”

Large Wall Street banks such as JP Morgan, Bank of America, Citigroup and Goldman Sachs generated growth in their equity and debt market businesses amid volatile markets, Fitch said.

“Results in Canada broadly compared unfavourably to U.S. peers, where strong capital markets performance partly offset the impact of large provision expenses,” it said.

The rating agency also pointed to the Canadian banks’ exposure to complex structured products as a weakness in their markets businesses.

“Similar to some large European banks active in global markets, some Canadian banks reported elevated losses related to structured equity derivatives positions during the most recent quarter, highlighting the vulnerability of these relatively complex products to material and prolonged deterioration of market conditions,” it said.

“Banks with more diversified equity capital market franchises that are active in cash products and flows were relatively less affected globally than banks mainly focusing on structured products,” it noted.

Fitch said revenues and earnings in the Canadian banks’ capital markets businesses are expected to recover as the equity market stabilizes.

“However, if these divisions of Canadian banks continue to underperform global peers, Fitch may lower its assessment of their contribution to earnings diversification when evaluating the banks’ overall ratings,” it said.