With market volatility likely to remain high for the rest of the year, Europe’s major investment banks should enjoy strong capital markets revenues, says Morningstar DBRS Inc.
In a new report, the rating agency noted that increased uncertainty due to shifting U.S. trade policy has pushed market volatility to record high levels.
As a result, it now expects the banks’ market-related revenues to come in stronger than previously forecast this year, as elevated volatility will likely boost their sales and trading businesses.
However, this strength in trading will be partly offset by weakness in the banks’ merger and acquisition advisory and equity underwriting segments, as the extreme uncertainty weighs on M&A and equity deals.
“We expect issuers to postpone any immediate M&A transactions and refrain from raising equity for most of the rest of the year,” it said.
The outlook for debt underwriting is “less clear,” it said, “as high yield issuances are likely to be postponed while other corporates could issue more debt to build up liquidity buffers.”
Additionally, the banks face some increased vulnerabilities — such as counterparty risk in prime brokerage “as margin calls increase” and leveraged lending risks — the report said.
The European banks have some exposure to leverage finance and hedge funds, and they remain “vulnerable to negative and rapid developments in the highly volatile environment,” it noted.
At the same time, the banks could benefit from an increased investor appetite for European assets.
While the Wall Street banks traditionally dominate the global investment business, “uncertainty regarding tariff decisions for the remainder of the year could mean a higher appetite from investors to focus more on the European Union and the UK,” it said. “These could include both European investments (sovereign debt and European equities) and broader investor and client bases, which could boost capital market revenues…”