back to balance for dealer advisors

With robust liquidity and solid leverage positions, the outlook for major securities firms is stable for 2021, says Fitch Ratings.

In a new report, the rating agency said that North American and European securities dealers will face macroeconomic and profitability challenges in the year ahead, but that this will be offset by their strong underlying fundamentals tied to liquidity and leverage.

Fitch also said that industry revenue trends should balance each other — for instance, increased M&A activity should help counteract a decline in trading revenues.

As a result, the rating agency is maintaining a stable outlook on the sector for 2021.

While the overall outlook is stable, Fitch did note that intensified political uncertainty, or a return to lockdowns in major economies, “may expose firms to more stress than currently expected.”

Looking at specific segments of the industry, Fitch indicated that full-service brokerage firms have generated strong earnings through the first three quarters of 2020, due in part to high trading volumes and strong capital markets issuance activity.

Yet, these trends are expected to slow in 2021, “as some of the activity has been brought forward to take advantage of an accommodative environment.”

For U.S. retail brokerage firms, the price war that has pushed trading commissions to zero means that net interest margins account for an even larger share of revenues, “making [firms] more sensitive to declines in interest rates,” Fitch said.

Looking ahead, the rating agency expects continued technology investments to enhance cost efficiency in the sector, given firms are likely to “explore ways to further monetize existing client relationships including growing financial advisory/planning capabilities tied to different pricing constructs,” Fitch said.

For independent advisory firms, Fitch predicts transaction volumes will remain elevated into early 2021. And, the agency said that inter-dealer brokers’ earnings will face “moderate pressure as a result of the lower volatility environment.”