Fitch: U.S. Banks' 3Q Revenue Spurred by Capital Markets Rebound
Strong debt issuance, tighter fixed-income spreads, and an equity market rally fueled a healthy rebound in capital markets revenues for the largest U.S. banks in the third quarter. Aggregate capital markets revenues (excluding debt valuation adjustments) for the top five U.S. trading banks rose 13% sequentially and 40% from third-quarter 2011, according to Fitch Ratings, recovering from the effects of significant market turmoil in the prior period.
Fixed income, currencies and commodities (FICC) trading revenues drove the bulk of the gains in the quarter, accounting for 55% of aggregate capital markets revenues for the top five banks. Strong FICC results offset still weak investment banking revenue growth, which has been held back by slow equity underwriting activity and a dearth of new M&A advisory fees. Total advisory revenue for the top five banks declined by 6% versus the year-earlier period.
Within the FICC category, notable growth was achieved in the rates, mortgages, and credit businesses, while currency and commodities performance appeared mixed. Some banks were affected negatively by low customer volumes and reduced volatility in currency and commodity markets.
Robust bond issuance, sparked by low interest rates and spread tightening in fixed-income markets during the quarter, drove a 21% sequential increase in debt underwriting revenues for the largest institutions. Issuance activity surged across investment-grade, high yield, and leveraged loan markets during the third quarter as treasurers rushed to lock in historically low yields.
Even as equity underwriting sagged (revenues down 8% sequentially) and advisory revenues were essentially flat, debt underwriting expansion boosted top-line results, especially for JP Morgan Chase and Bank of America (the market share leaders in that space among U.S. banks in third-quarter 2012).
We expect capital markets revenue trends to remain volatile over coming quarters, with global market risks persisting in the face of significant macro headwinds, growing concerns over fiscal drag in the U.S.; diminishing returns from monetary stimulus; a more challenging corporate earnings outlook; and pending new regulations, such as the yet to be finalized Volcker Rule. With no near-term pick up in advisory and equity underwriting in sight, FICC performance will likely remain the primary driver of capital markets revenues during the fourth quarter and into early 2013.
For a comprehensive review of third-quarter financial results for the top U.S. banks, see Fitch's upcoming publication, "U.S. Banking Quarterly Comment: 3Q12," at www.fitchratings.com.
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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