Wall Street’s big banks are likely to report lower capital markets revenues for the second quarter, predicts Fitch Ratings.
The rating agency said Tuesday day that it expects capital market revenues for U.S. global trading and universal banks will come in lower, on a year-over-year basis, when the banks kick off reporting for the second quarter on July 11. It says that continued declines in the fixed income, currency and commodities (FICC) segment are outpacing improvements in the equity capital markets business and investment banking.
While some of the big banks “have publicly telegraphed this potential weakness for some time, more recent trading data and continued low volatility confirm the expectation,” Fitch says.
In the first quarter, the big Wall Street firms, including JP Morgan Chase, Bank of America, Citi, Goldman Sachs, and Morgan Stanley, reported a year-over-year drop of nearly 6% in combined capital markets revenues to US$28.7 billion, Fitch notes. It expects that the decline will likely be more significant in Q2.
“FICC businesses are expected to continue to be impacted by lower trading volumes and the Fed’s steady withdraw from quantitative easing. These cyclical factors, coupled with ongoing secular headwinds associated with increased regulation, will further drive [their] overall FICC revenues lower,” it says.
Fitch says that it expects FICC revenues to “continue to grind lower in future quarters, albeit at a slower pace, until volatility returns, rates begin to normalize, and the specifics of the new regulatory operating environment are optimized.”
It also expects equity trading revenues to be materially lower in the quarter, reflecting the significant drop in average daily trading volumes. The industry saw the lowest equity trading volume in June for any June since 2006, it notes.
“According to Credit Suisse, average daily volumes dropped more than 15% to 5.8 billion shares in June from 6.9 billion in the first three months of the year,” it says, adding, “Morgan Stanley could be the most vulnerable to reduced equity trading as this has historically been the largest contributor to its overall capital markets segment.”
One positive, it notes, is the continued rise in equity markets, which has, in turn, driven continued inflows to equity funds. “This could help stabilize daily volumes in future quarters,” it suggests.
Additionally, it says that the investment banking business is enjoying relative strength, with equity underwriting up 42% in the second quarter, and debt underwriting up nearly 12%. While completed M&A was down 17%, Fitch says that announced M&A was up 92%, “suggesting potential M&A revenue improvement in future quarters”.