Profits at the major Wall Street firms will likely remain under pressure in the year ahead, but the rating outlook is stable Fitch Ratings says, due to their improved capital positions.
The rating agency says that it expects the global trading and universal banks to see pressure on their earnings in 2015, yet its outlook for the sector remains stable as the banks have continued to strengthen their balance sheets. All of the big banks in the sector, “have made good progress in strengthening balance sheets, mainly by reducing risk exposure,” it says.
The big firms are all considered global systemically important banks, meaning they face added capital requirements, which Fitch says “will create a sizeable additional buffer of bail-in debt” in the medium term. It also notes that improved capitalization will help the banks absorb further fines and sanctions that may arise, as all of the banks in the group remain exposed to conduct risk.
Fitch says that efforts to improve the ability to resolve these big firms in the face of possible failure — without relying on taxpayers — will remain key projects in the year ahead. As a result, their structures, capital allocation and debt stratification within the banking groups will evolve. “Failure to implement these changes smoothly could signal management or capital weaknesses and could result in a change of our outlook or ratings,” it says.
“The stable outlook on the sector is based on our expectation that the global economic recovery will continue, albeit at a sluggish pace,” Fitch says. Its main downside scenarios include the effects of a sharp and unexpected hike in U.S. interest rates, and a deflationary scenario in the eurozone.
Nevertheless, it says that lower risk appetites should help the banks avoid material losses in these scenarios, “but an adverse operating environment could result in a change of our outlook if earnings prospects suffer materially.”
As it stands, profitability varies widely among the banks in the peer group, Fitch says. “Low interest rates mean that margins remain under pressure, which we expect to continue until short-term interest rates increase,” it says, noting that the performance of securities businesses have suffered from low market volatility this year. “A moderate increase in market volatility that results in improved trading volumes should help earnings, but overall we expect earnings to remain under pressure,” it says.