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US GTUB Strong Advisory Won't Offset Weak Debt Trading

January 8, 2016

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US global trading and universal banks' (GTUBs) advisory fees will reach record numbers for 2015, but the contribution will not be enough to overcome declines in fixed income, currencies and commodities trading (FICC) and debt/equity underwriting, says Fitch Ratings.

Overall, across the five US GTUBs, Fitch sees full-year 2015 capital markets revenue holding roughly steady, at best, barely beating 2014's full-year mark of $102.0 billion.

Advisory fees, mostly generated by merger and acquisition (M&A) activity, collectively represent less than one-tenth of the overall capital markets revenue pie across the aggregate businesses of Bank of America, JPMorgan, Citi, Goldman Sachs and Morgan Stanley. Trading and investment banking underwriting revenues represent the remaining 90% of these firms' capital markets businesses. The pressures on some of these other segments, particularly FICC, still outweigh the fees generated from the recent spate of M&A.

M&A grew for the fourth straight year in 2015, eclipsing the prior peak year of 2007. More than $4.7 trillion in deals were announced in 2015, with $1.5 trillion of M&A deals announced in the fourth quarter alone, according to Dealogic. The strength of M&A had already lifted advisory revenues by 31% through the first nine months of 2015 to about $7.4 billion across the five US GTUBs.

Advisory services' contribution to overall investment banking (debt/equity underwriting and advisory) represented about 38% of investment banking revenues among the five US GTUBs in third-quarter 2015, up from 29% in third-quarter 2014.

Looking ahead, Fitch believes that M&A activity is unlikely to meaningfully alter the overall capital markets revenues, even as the FICC remains challenged. M&A is episodic, volatile and subject to market valuation cycles. If banks hope to further boost advisory business, they are limited by dependencies on CEO/board confidence in deal execution and valuations, as well as the availability of financing.

Declines in FICC, as well as the downturn in debt/equity underwriting over the last months of 2015, will offset M&A fees, generally resulting in flat capital markets business revenues for full-year 2015. FICC revenues already declined 10% to $35.7 billion through the first nine months of 2015 among the five US GTUBs. The seasonal drop off in fourth-quarter FICC revenue may not be as severe as the 35% sequential drop in the fourth quarter of 2014. Bank of America and Citi indicated in December that their expectations were for single-digit improvements in FICC in fourth quarter on a year-over-year basis.

Debt and equity underwriting fees were also down 8.9% through the first nine months of 2015, with equity underwriting especially weaker (down 15.3%) due to higher equity market volatility, which caused several deals to be delayed.

Equity trading should be a positive in year-end reporting. Through the first nine months of 2015, equity trading revenue was up 18.9% to nearly $23.0 billion. Fourth quarter's results should also be good. Equity trading comprised 28% of overall capital markets revenue through the first nine months of 2015, versus just 9% ($7.4 billion) for advisory.

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.