The equity trading and investment banking businesses of the major U.S. banks are starting to show signs of life, but challenges remain, says Fitch Ratings in a new report.
The rating agency says that the outlook for trading and investment banking may be brightening somewhat, but it cautions that weak volumes, and a still-sluggish environment for mergers and acquisitions, “are likely to hold back revenue growth in the near term”. Unresolved fiscal issues remain a downside risk too, it notes.
Fitch reports that aggregate capital markets revenues for the top-five U.S. banks (JPMorgan, Citigroup, Bank of America, Goldman Sachs, and Morgan Stanley) grew by 39% year over year in the fourth quarter. “Despite the typical seasonal slowdown in the fourth quarter and deep concerns over fiscal issues late in the year, capital markets revenues declined by only 10% sequentially from a generally solid [third quarter],” it says.
It notes that equity underwriting and advisory revenues for the top-five banks recorded growth in the fourth quarter, compared with the prior quarter. Underwriting revenues grew by 16% sequentially and 34% year over year, it says. And, advisory revenues rose by 17% sequentially, and 13% versus the prior-year period. Moreover, Fitch says that, “the major banks have generally reported a better pipeline of advisory and equity underwriting activity moving into 2013.”
That said, it also cautions that lingering macro risks, such as the fiscal situation in the U.S. and Europe, “have not been addressed to the extent necessary to support rapid growth in deal volume.”
“Relief surrounding the tax agreement reached at year end has fuelled a pickup in equity volumes and share prices since the beginning of January. Still, market activity could again be hit by fiscal uncertainties in March, when debate over sequestration and the expiration of federal spending authority could raise the risk of fiscal drag later in the year,” it says.
And, it notes that equity underwriting and advisory revenues accounted for a smaller share of the revenue mix for major U.S. banks in the fourth quarter, representing 8% and 5% of total capital markets revenues, respectively.
Fitch says the first quarter is typically the strongest for U.S. banks’ capital markets revenues. “A continuation of somewhat better equity market performance witnessed so far in January, coupled with improving deal flow, could set the stage for good capital markets revenue growth in [the first quarter],” it says. “However, the looming fiscal battles that are set to intensify in the spring could undercut any signs of revenue strength evident in the early part of the quarter.”
And, it says that a recovery in advisory and underwriting volume may not necessarily foretell a bounce back in equity trading volumes. That activity appears to be weakening on a secular basis, it says.
Finally, Fitch notes that the profitability of the capital markets segments of the big banks generally benefited from recent cost-cutting initiatives. “We believe this pattern will continue, with increasing specialization in capital markets segments, such as equities trading, M&A advisory, and debt capital, as banks focus on their key strengths,” it says. “In addition, banks are focused on those businesses within capital markets where they can achieve adequate returns on a Basel III risk-weighted basis.”