Fitch: Weak Underwriting, Trading Affect 1Q US Cap Mkts Results

NEW YORK & CHICAGO--(BUSINESS WIRE)-- Link to Fitch Ratings' Report: U.S. Banking Capital Markets Quarterly: 1Q16 (Challenging Underwriting and Trading Conditions Continue)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=880892

Headwinds across most capital markets businesses in 1Q16 made for a difficult operating environment for the US Global Trading and Universal Banks (GTUBs), as reflected in decreased net revenue for the business line, according to Fitch Ratings.

Volatile markets over the past several months subdued new debt and equity issuance and weighed on the performance of trading businesses, signaling a challenging start toward full-year results.

Overall capital markets net revenue for the five US GTUBs was collectively down 22% in 1Q16 from the particularly strong prior-year quarter. However, overall capital markets net revenue rose 18% from the sequential quarter as the fourth quarter tends to be slower.

Within the capital markets businesses, equities markets net revenues were down 14% from 1Q15, which was particularly strong, but up 17% from the sequential quarter due in part to seasonality. Financial advisory net revenue, which has been a bright spot for many investment banks over the past couple of years, slowed in 1Q16 relative to both the sequential and quarters and 1Q15. The decline in overall advisory net revenue can be partly attributed to a delay in the closing of potential transactions against a challenging operating landscape. These delays, with some continued new announcements, pushed up M&A backlogs according to the US GTUBs. Should market conditions improve over the balance of the year, it is likely that advisory net revenue could accelerate.

More significantly, results from the Fixed Income Currencies and Commodities (FICC) businesses, which are the largest components of overall capital markets revenues, remained challenging, notably in the credit, mortgage and securitized products areas.

As a result, the US GTUBs continue to examine the amount of resources devoted to FICC given the level of fixed costs and the amount of capital that must be held in the business. There have been headcount reductions in FICC across all of the firms so far this year, and management teams have indicated that more could be forthcoming in the event that market conditions do not begin to improve more meaningfully.

While there has been significant de-risking in this business as evidenced by lower risk weighted assets attributable to FICC, Fitch is expecting firms to reduce costs and explore ways to turn over their inventory faster through the use of various technology solutions.

For more information, please see Fitch research on "U.S. Banking Capital Markets Quarterly: 1Q16," dated April 2016, which is available on our website at www.fitchratings.com.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Source: Fitch Ratings

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