Fitch says that profitability could be weakened if the spread continues
The global banking sector could be facing a significant downturn in capital markets revenue due to the spread of the coronavirus outbreak.
With more cases and areas being affected, a new report from Fitch Ratings says that the global trading and universal banks (GTUBs) will see a negative impact on their revenues due to continued uncertainty and significantly increased volatility.
If the outbreak is contained, then this impact may not spread to earnings but if it is not, then Fitch says there could be weakened asset quality and credit ratings over time.
Market volatility is likely to mean reduced issuance activity following a strong start to 2020. This will dent what is normally strong first quarter results for banks.
And while there is likely to be further economic policy action from governments, not all will have a positive effect for banks, such as the Fed’s decision to cut interest rates by 50 basis points this week; with the BoC widely expected to do so too.
“While the Fed response may spur issuance activity, it will also negatively affect asset yields, resulting in lower margins and reducing bank profitability,” Fitch says.
Although Fitch says that increased volatility can help trading revenue, the uncertainty that underlies this may be a negative.
“Transaction volumes in many trading businesses could taper off once investors and corporates have readjusted their portfolios,” the report says.
Fitch notes that this environment resembles fourth-quarter 2018 and first-quarter 2016, which saw days with elevated VIX (Volatility Index) but notable year-over-year declines in markets businesses.
The decline in capital markets revenue will affect banks to varying degrees.
Morgan Stanley for example, derives around a third of its total revenues from fixed income, currencies, and commodities, and equity trading. For Goldman Sachs it is 40%. JPMorgan, Citigroup, and Bank of America are less reliant on this income.
While Fitch says that market exposure from trading is a material risk for banks, conservative risk appetite should mitigate material losses from volatility and uncertainty. But there are other possibilities.
“Trading activities could also come under pressure if banks have to enact operational changes to ensure business continuity, or if material portion of the banks’ staff have to work from home or from off-site locations,” the report warns.
Those banks with material businesses in Asia, such as wealth management, could see asset deterioration first especially if there is a significant hit to the region’s GDP.