The big Wall Street banks all delivered solid first quarter results, with market volatility boosting their capital markets revenues and asset quality holding up — but their regulatory capital declined, which is credit negative, says Moody’s Ratings.
In a new report, the rating agency said that the six large global banks — Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo — posted robust quarterly operating results amid a choppy market environment that drove higher trading revenues, alongside solid investment banking activity and stronger net interest income.
“The banks’ diversified business mixes generated strong returns on pretax pre-provision net revenue to risk-weighted assets, and credit costs were broadly stable,” it said — noting that the banks generated moderate year-over-year improvements across most of their business lines.
In particular, robust capital markets activity provided a “significant boost” to Wall Street’s results, it said.
“Trading revenue increased year over year across all six banks, reflecting strong client activity amid elevated market volatility,” it said. “Equities trading was a clear outperformer, driven by higher client volumes, strong derivatives activity, and continued growth in prime brokerage balances, particularly at firms with large institutional franchises.”
The banks’ fixed-income trading results were “more uneven” Moody’s said — with “strength in macro-oriented businesses, such as rates, currencies, and commodities … partly offset by softer performance in certain spread products, including securitized products and credit.”
The firm’s investment banking revenues were also up in the quarter, led by strength in the advisory and equity underwriting businesses.
“Advisory fees increased materially year over year, supported by a sharp rise in the value of completed U.S. M&A transactions despite a modest decline in deal volumes, with larger average deal sizes benefiting firms with strong advisory franchises,” the report said.
Additionally, equity underwriting revenues rose on increased issuance activity, and debt underwriting “remained solid but more mixed,” it noted, “as strong investment grade issuance was partially offset by continued softness in leveraged finance.”
Net interest income strengthened at the four universal banks (BofA, Citi, JP Morgan and Wells Fargo), even as net interest margins came under increased pressure, the report said.
Loan growth also increased across all six banks — with asset quality holding up, despite elevated economic and geopolitical uncertainty.
“Early stage delinquencies in consumer card portfolios remained fairly benign across the group even though consumers are having to cope with higher gasoline prices, while charge-offs in wholesale portfolios remained largely idiosyncratic, with selective increases tied to individual commercial real estate names or commercial and industrial exposures that had been previously identified and reserved for,” the report said.
Some of the banks increased credit provisions due to the increased uncertainty in the operating environment, it noted.
Capital ratios decline
However, the banks saw their regulatory capital ratios continue to decline, which is a credit negative, Moody’s said.
While all of the banks still have capital ratios that are significantly above their current requirements, it’s expected that those ratios will decline, as banks seek to reduce those cushions in order to free up capital.
Indeed, if the banks all reduced their existing capital surpluses to 1% above current regulatory minimums, “this would free up about US$66 billion of capital to distribute to shareholders or utilize in their business activities,” the report noted.
“We expect the banks’ capital ratios to decline over the medium term, but also that they will typically await greater clarity on the resolution of pending regulatory proposals before fully executing their intentions,” it said.