The recent spike in market volatility amid intensifying fears about the effects of the coronavirus is going to hit Wall Street’s revenues, says Fitch Ratings.
In a new report, the rating agency said that uncertainty about the impact of the Covid-19 virus is negatively affecting securities underwriting and boosting market volatility, which is likely to hurt capital markets revenue at the big global securities firms.
“We do not expect this hit on earnings to affect [firms’] ratings if the outbreak is quickly contained, but prolonged revenue weakness and deterioration in asset quality if a weaker economic outlook becomes more deep-rooted could pressure capital levels and ultimately ratings over the longer term,” it said.
At this point, Fitch expects increased market volatility will “likely reduce issuance activity, which will dent revenue in the normally seasonally strong first quarter.”
The emergency rate cut by the U.S. Federal Reserve “may spur issuance activity, [but] it will also negatively affect asset yields, resulting in lower margins and reducing bank profitability,” it said.
While increased market volatility can boost trading revenue, Fitch said that the sharp rise in volatility and trading volumes “reflects high levels of uncertainty,” which could threaten markets revenues.
“We do not expect material trading losses resulting from volatility spikes or credit spread widening,” Fitch said, as the banks’ own risk appetites remain modest.
“Any sign of outsized hits on trading revenue could indicate control weaknesses or heightened risk appetite, which would be viewed negatively from a credit perspective,” it said.
“Trading activities could also come under pressure if banks have to enact operational changes to ensure business continuity, or if a material portion of the banks’ staff have to work from home or from off-site locations,” it said.
Additionally, some of the large global firms have significant businesses in Asia, “where asset quality deterioration would likely emerge first.”
“Current asset quality ratios are sound, but a severe hit to GDP growth in the region would test the banks’ underwriting quality after a prolonged period of sustained business growth and a benign credit environment,” Fitch said.
The rating agency has a stable outlook on the U.S. banks and a negative outlook for the European firms, “with reduced capital markets activity making it more difficult for banks to reach lowered profitability targets.”