Weak markets led to soft revenue numbers for the top Wall Street banks in the second quarter, and the outlook for the coming months doesn’t look much better, according to Fitch Ratings.
In a research note, the rating agency reports that a significant slowdown in global capital markets activity, and weakness in equity and fixed income markets, during the second quarter contributed to soft revenue results for the top five U.S. banks — Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, and Morgan Stanley.
Fitch says that the revenue pressure was particularly acute in the fixed income, currencies and commodities (FICC) category, which declined by 41% sequentially in the second quarter, and decreased by 9% year over year. Weakness in the fixed income markets in particular drove much of this trend, Fitch reports, with all of the major categories within fixed income posting declines, “as the macro uncertainties resulted in sharply lower customer flows and banks were generally more cautious on overall risk levels.”
Looking ahead, Fitch expects the third quarter “to offer little relief on the revenue line as concerns over a potential global slowdown and pending regulation restrain near-term growth prospects.”
In the short term, risks to FICC revenues “are significant”, Fitch says, as the finalization of the Volcker rule may force changes in market-making activity for the largest trading banks. “On top of the shutdown of proprietary trading desks, already completed in response to new regulation, a curtailment of market-making activity would put further pressure on top-line results for the largest single category of capital markets revenue,” it says, noting that this accounts for more than 50% of total capital market revenues for the top firms.
Overall, Fitch expects customer flows in equities and fixed income to remain on the weak side during the third quarter, as the already-soft trading volumes due to global market uncertainty are reinforced by the usual slowdown in summer trading.
And this, may well lead to further job losses, it warns. “We expect the largest U.S. banks to continue efforts to boost operating efficiency in their capital markets businesses as economic uncertainty, weak trading volumes, and concerns over forthcoming regulation erode expected returns in those units. The focus on efficiency and cost cutting has already led to notable headcount reduction in capital markets businesses, and this pattern will likely continue as revenue growth and returns lag,” it says.