A spike in market volatility during fourth quarter 2018 dragged down overall capital markets results for the five major U.S. trading banks including: Bank of America Corporation (BAC), Citigroup, Inc. (C), The Goldman Sachs Group (GS), JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS), according to the latest report from Fitch Ratings.
“Market volatility can be a boost to trading revenues; however, too much volatility in fixed income sales outweighed strength in equity trading and advisory revenues this quarter,” said Julie Solar, senior director, Fitch Ratings. “Too little volatility results in fewer trading opportunities, but too much keeps investors on the side lines.”
Total debt underwriting revenues fell 24% from the year-ago period, reflecting volatility, particularly impacting the high-yield market. Fitch expects that some volume was financed directly by commercial banks, which reported very strong commercial and industrial loan (C&I loan) growth trends in 4Q18.
However, despite a challenging final six weeks of the year, record earnings during the first part of the year contributed to the highest full-year results since 2009. Capital markets revenues for the five banks included in this report totalled $107 billion in 2018, approximately 4% higher than in 2017, aided mainly by a significant increase in equity sales and trading revenues.
M&A activity in 4Q18 increased a considerable 37% versus last year, buoyed by a significant rise in M&A completions and continued strength from the technology and healthcare sectors. Several banks noted that deal pipelines remain strong, although down on a linked-quarter basis.
“Even with a strong backlog of deals, continued volatility and market sentiment could impact banks’ ability to bring transactions to market, and the IPO pipeline may also feel an impact from the prolonged government shutdown as the SEC was unable to review pending IPOs for several weeks. 2019 is off to a strong start and the first quarter is typically the strongest of the year, but it is unclear how investment banking revenues could be impacted,” added Solar.
