What’s Happening
- The global economy seems to be steadier than it was last year, and interest rates seem to have peaked and may be cut–two potentially positive developments for banks’ debt underwriting, equity underwriting, and advisory businesses.
- At the same time, lower volatility in 2024 and tough comparisons to last year will likely be headwinds for banks’ fixed income, currencies, and commodities (FICC) trading revenue.
Why It Matters
- We think the strength of banks’ capital markets revenue will be a meaningful part of the strength of 2024 revenue overall for the banks that participate in this business line–especially as they grapple with, among other things, increasing deposit rates and their exposure to U.S. commercial real estate.
- Combined capital markets revenue for most of the banks covered in our commentary declined modestly in 2023. Combined advisory revenue, in particular, tumbled 20% last year for the banks in our commentary amid economic uncertainty and a slowdown in deal volume.
Looking Ahead
- Risks to banks’ 2024 capital markets revenue include geopolitical tensions, the ongoing armed conflicts in two regions of the world, and the upcoming U.S. presidential election. These all have the potential, in our view, to bring uncertainty and volatility to the capital markets.
- Higher-for-longer interest rates could also hurt results.
- Other key themes we’re watching across capital markets in 2024 include:
- Dynamics of advisory revenue
- Competitive threat from private credit
- Headwinds upon Basel III finalization
Ratings View
- From a ratings standpoint, a bank’s capital markets revenue is more volatile and difficult to predict, and it often carries greater risks than its lending activity. However, when capital markets activity is done in a prudent manner, and if it’s not outsize in terms of a bank’s revenue stream, revenue derived from the capital markets can complement that bank’s business model. At the same time, an overreliance on capital markets revenue can weigh on bank ratings.
The Bottom Line
- We project that banks’ capital markets revenue will be flat to up 10% in 2024.
- At the same time, we think there will likely be some rotation in terms of which parts of the capital markets business will drive performance.
Positively, the banking system, after several noteworthy bank failures last year, seems to be on more solid footing. Much of the focus has turned to the extent of banks’ exposure to U.S. commercial real estate. In addition, increasing deposit rates will likely hurt net interest margins this year; this, in turn–along with the sluggish loan growth that we expect–will likely pressure net interest income. Given this headwind, capital markets revenue will be an important factor in determining the strength of banks’ earnings this year, mainly for the large banks that are active in investment banking and trading. In the U.S., we expect the banking industry to generate a return on equity of about 10%, down from 11% last year. Our expectation for European banks is marginally below this level, but it’s still supportive of our ratings.
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Source: Stuart Plesser, Financial Institutions Managing Director, S&P Global Ratings
For more information or to speak with Stuart, please get in touch.
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