As some of the U.S. tariff drama recedes, financial market volatility is expected to ease, which will reduce some of the underlying support for investment banks’ sales and trading revenue — but underwriting and advisory activity is likely to remain subdued amid the ongoing policy uncertainty, says Morningstar DBRS Inc.
In a new report, the rating agency said that, in the second quarter, the European banks with significant capital markets businesses reported “strong momentum” and “significant growth” in their capital markets revenues.
In aggregate, the banks reported US$3.4 billion in capital markets revenues in the second quarter, which was up 12% from the same quarter a year ago.
The strength in this segment was driven by the robust performance of the banks’ sales and trading businesses amid, “extraordinary levels of volatility in Q2, particularly in April, driven by geopolitical and trade uncertainty.”
Trading revenues were strongest in the fixed-income segment, DBRS reported — with revenues in the segment rising by 27% on a year-over-year basis in the second quarter, “reflecting higher client activity.”
Equity trading revenues were up by 12% in the quarter, “driven by higher client activity in cash, derivatives and prime brokerage.”
At the same time, “the slowdown in advisory and underwriting revenues intensified,” in the second quarter, DBRS said.
“This was more visible in underwriting, which we attribute to market participants being reluctant to issue until there was greater clarity regarding the uncertain geopolitical and macro-environment, including the U.S. tariffs,” the report said.
In aggregate, underwriting revenues were down 27% year-over-year in the quarter. The weakness in underwriting performance “intensified” in the second quarter, DBRS said — noting that revenues were only down by 14% in the first quarter.
In the second quarter, advisory revenues were down 8% in aggregate.
Looking ahead, with several recent trade deals, DBRS said it expects capital markets revenues to “return to normalized levels,” as volatility declines in the second half of 2025.
However, the firm doesn’t expect advisory, or equity underwriting, activity to pick up in the short term.
“We expect some mergers and acquisitions and equity-raising deals to be paused until 2026,” it said.