Combined fourth-quarter 2014 capital market revenue (including fixed income, currencies, commodities, equity trading, and investment banking) for the five US global trading and universal banks (GTUBs) is not expected to materially change year over year (yoy) when they begin year-end reporting this week, says Fitch Ratings. Fitch expects equity trading and M&A revenues to be up meaningfully, while debt and equity underwriting revenue declines are likely to offset these gains. For the first nine months of 2014, US GTUBs have already reported capital markets revenue of $80 billion on a combined basis, virtually unchanged from the first nine months of 2013.
Fixed income, currency and commodities (FICC), typically the most significant contributor to capital market revenues for four out of five the big US banks (JP Morgan Chase, Bank of America, Citi and Goldman Sachs) is expected to be near flat or slightly lower on average, reflecting lower trading volumes across product types. As one indicator, average daily trading volumes in October and November across all bond types were up just 0.6% versus the same two-month period in 2013, according to the Securities Industry and Financial Markets Association.
Although volatility levels finished the year relatively muted, currency and commodity trading revenues within FICC segments should overall receive a modest boost from the uptick in volatility during the quarter. Declining values for many of the world's currencies relative to the US dollar and oil's precipitous decline likely increased client activity, but gains may be offset by erosion in trading book valuations.
Combined FICC revenue through the first nine months of 2014, which comprised about 49% of the US GTUBs' combined total capital market segment revenues, was 5.2% lower than the same period nine-month period last year.
For equity trading, the late-September through October volatility pick-up, combined with upward trending equity indices through the quarter, should drive increases in year-over-year results. Morgan Stanley could be the biggest beneficiary of higher equity-trading volumes, as they have historically been the largest contributor to the bank's overall capital market segment results.
In investment banking segments, fees from global equity underwritings are likely to be lower as the value of deals declined approximately 20% from fourth-quarter 2013's levels, according to data compiled by Thompson Reuters. Debt capital markets revenue is also expected to be lower, reflecting a 2.8% yoy decline in debt underwritings, globally. However, completed M&A transactions were up approximately 35% yoy, which will translate into a higher level of advisory fees.
The reporting season for the seven European GTUBs starts in late January and runs through early March. We expect capital markets earnings for these banks to follow similar trends. The European GTUBs generated about $48 billion in the first nine months of 2014, about 12% lower than in the same period in 2013, as some of the banks reduced their securities business.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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