An uptick in market volatility could help global investment banks recover from a weak first quarter for their trading businesses.
Among a sample of 12 global banks, five from the US and seven from Europe, all reported year-over-year declines in their equities income, S&P Global Market Intelligence data shows. Ten of the banks reported double-digit declines in equities income, with Credit Suisse Group AG posting the highest at 36.17%. Among US banks, Citigroup Inc. booked the highest decline at 24.54%.
Client activity was lower due to a drop in IPOs and other equity issuances, said Venkatarao Bodapati, associate director at research provider Acuity Knowledge Partners. Chile customers also shifted to fixed income products against the backdrop of high interest rates.
The decline also reflects an unfavorable comparison with a strong first quarter of 2022, when Russia's invasion of Ukraine sparked heightened volatility, said Maria Rivas, senior vice president at the global financial institutions team at DBRS Morningstar.
Whether interest rates will stabilize later in the year will be a key determinant of banks' equities performance, said Rivas. With recent commentary from banks indicating expectations of one or two more rate hikes, markets are expected to "remain choppy" in the coming months, Bodapati said.
Trading volumes are likely to stay low in the second quarter but should stabilize or strengthen in the second half of the year, Bodapati said.
Banks are expected to offset weaker equities revenues with their performance in fixed-income, currencies and commodities (FICC), Rivas said.
Nine of the sampled banks reported higher FICC income in the quarter. Bank of America Corp. was the highest gainer with a 27.03% increase year over year. The FICC sample included Deutsche Bank AG, which no longer does equities trading after exiting the business in 2019.
In Europe, HSBC Holdings PLC booked the highest increase at 22.58%. French banks Société Générale SA and Groupe BPCE also achieved double-digit growth in FICC income in the quarter.
"The uncertain banking environment should move volatility levels higher, and this should boost client activity, which is particularly positive for FICC sales and trading activities and the revenues," Rivas said.
The nearing of the debt ceiling in the US will also have created further trading opportunities and influenced FICC income in the short term, Bodapati said.