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US Banks’ 4Q strong capital markets results led by FICC

Fixed income currency and commodities (FICC) are the key driver of overall capital markets results, offsetting a typical seasonal slowdown at the end of the year.

FICC fixed income currency commoditiesAccording to Fitch Ratings increased trading activity following the US election helped to drive US trading banks’ capital markets net revenues to their best fourth-quarter level in five years. Fixed income currency and commodities (FICC) continued to be the key driver of overall capital markets results, offsetting a typical seasonal slowdown at the end of the year. Whether strong fourth-quarter earnings will translate into sustained improvement in capital markets activity across product sectors in 2017 remains to be seen.

Capital markets net revenues at the five U.S. Global Trading and Universal Banks – Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley – were up 20% on a year-over-year (yoy) basis in the fourth quarter, totaling an aggregate $24.9 billion. FICC, by far the largest contributor, reported a 48% year-over-year increase, marking a particularly strong fourth quarter when compared against a weak 4Q15. Net revenues were down on a sequential quarter basis, although less so than is typical in the fourth quarter.

Client re-engagement and market positioning, particularly in credit and rates and driven by post-election market activity, helped to account for the strong FICC results.

Investment banking had comparatively mixed results, with equity underwriting down while debt underwriting was up yoy. Advisory was down yoy but was boosted on a sequential quarter basis by many large deals closing. Management guidance for forthcoming investment banking revenues is optimistic, although Fitch notes that the correlation between guidance and revenues tends to be weak; market volatility is often a better predictor of revenues in this segment. Should the VIX Volatility Index dip lower, indicating lower downside volatility and increased executive management confidence, it could be positive for investment banking revenues.

Despite the higher market and client activity, value-at-risk remains near historical lows due to lower inventory positions.

Trading results can be episodic and heavily driven by macro or other events. With FICC and equity trading continuing to be the major drivers of capital markets revenues, projecting the extent to which the aggregate capital markets trends seen in 4Q16 will carry into 2017 is difficult. Notably, Fitch believes that structural changes to FICC markets resulting from regulatory changes and reduced inventory may be a factor that could affect revenues and weigh on a sustained cyclical upswing in the segment.

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