With Wall Street banks starting to report third quarter earnings this week, Moody’s Investors Service says it expects to see improvements in investment banking revenues and flat trading revenues.
The large, U.S.-based global investment banks — including Bank of America Corp., Citigroup Inc., Goldman Sachs Group, Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co. — are due to begin reporting their Q3 results this week.
On the investment banking side, the rating agency said in a report that debt and syndicated loan issuances both generally increased in the third quarter.
“Debt issuance volumes across the board were up from a year ago, reflecting both market expectations that the Fed is nearing the end of its rate-hike cycle and the development of a moderately more benign economic outlook during the quarter,” Moody’s said, adding that the pace of rate hikes was also much slower in the third quarter than a year ago.
At the same time, secondary equity offerings “were near a six-quarter high, even though IPO volumes were fairly flat,” it said.
Merger and acquisition activity rebounded in the quarter, Moody’s said, with Q3 the most active quarter this year in terms of the number of transactions, although completions were still down from a year ago.
Given that investment banking fees generally map directly to deal volume, these trends are “solid predictors of investment banking revenue,” Moody’s said.
Meanwhile, in sales and trading, the rating agency said it expects revenue will likely be flat to slightly lower on both a quarter-over-quarter and a year-over-year basis.
“Trading volumes in equities, credit, exchange-traded funds and options and futures on fixed-income, currencies and commodities (FICC) products were mostly flat sequentially and year-over-year,” the report said, noting that equity market volatility reached a three-year low in Q3.
“Volatility and bid/ask spreads continued to decline and secondary trading volumes were roughly flat, which will likely limit any significant growth in trading revenue,” it said.
In the more opaque FICC markets, trading data from exchange-traded derivatives on interest rate, commodities, foreign exchange and credit products, signals activity in the underlying assets and demand for hedging, which generally translate into flows and market-making opportunities at the banks’ FICC trading desks, Moody’s said.
Based on these kinds of indicators, the firm expects FICC sales and trading revenue for the third quarter “to be flat to slightly lower,” it said.