Investment banking and capital market activity should continue to bolster the earnings of the 12 Global Trading and Universal Banks (GTUBs) in 2021, Fitch Ratings said in a new report. Capital and financing needs, together with monetary and fiscal stimulus underpinning market valuations and liquidity, should continue to support these businesses, which provided banks with much-needed revenue diversification in 2020. That said, earnings from sales and trading, underwriting, and advisory are still inherently more volatile than more traditional banking, especially given their high-cost structure and associated risks.
In itself, a high market share in these businesses is rating positive, as strong franchises and scale enable better client selection and cost efficiencies. However, outsized exposure to investment banking and capital market businesses can limit the rating upside due to associated earnings volatility, operational risk, and conduct risk.
The US GTUBs are better placed than their European peers to benefit from investment banking and capital market businesses given their broader franchises, which allow for greater revenue diversification. The European GTUBs are likely to continue to operate only in selected business segments following their refocusing on areas of relative strength, with narrower coverage and franchises.
“We believe banks with more focused capital market businesses will be able to continue collaborating with other divisions to help defend market share and earnings. Moreover, secular trends that have been accelerated by the pandemic (such as demand for ESG [environmental, social, and corporate governance]-related products and for private assets in an ultra-low-interest-rate environment, and increased adoption of electronic trading in fixed-income and currency markets) will offer opportunities for competitive differentiation, but also significant risks. Fitch also expects the growth potential of Asia-Pacific economies to help banks with strong footprints in the region,” Fitch added.
Investment banking and capital markets bolster GTUBs’ prospects
25 Mar 2021
Investment banking and capital markets bolster GTUBs’ prospects
25 Mar 2021
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