Author: Brian Bertsch

Fitch Ratings believes results from capital market activities of major U.S. banks have the potential to decline meaningfully in 2Q12. Market concerns over Europe have resurfaced in 2Q12, and the recently announced JPMorgan Chase (JPM) losses have magnified overall market uncertainties. Consequently, the current quarter has been characterized by general spread widening in fixed income markets and more difficult equity markets. Linked quarter comparisons are also compounded by the fact that the first quarter of the year is typically the strongest seasonally.

“Fitch Downgrades JPMorgan to 'A+/F1', L-T IDR on Watch Negative”

Generally, Fitch's ratings of major U.S. banks already reflect the inherent volatility of their capital markets businesses. The lone exception is JPM, given its recent outsized losses combined with the ongoing uncertainties and questions surrounding this event. For more information, see "Fitch Downgrades JPMorgan to 'A+/F1', L-T IDR on Watch Negative," dated May 11, 2012, at www.fitchratings.com.

With the heightened uncertainties, customer trading activities have likely slowed and underwriting volumes in both fixed income and equities have moderated. In addition, fees generated from merger and acquisition activity remain generally soft. The negative share performance of Facebook following the recent IPO may dampen overall sentiment further and potentially reduce additional activity in the tech space. This area was a potential bright spot in an otherwise sluggish period for IPO and other underwriting activity. If these trends persist, revenues and earnings from capital market-related businesses will likely suffer in linked-quarter and possibly year-over-year comparisons.

Beyond the effect on market sentiment, the JPM losses have refocused attention of both politicians and regulators on risk taking at U.S. banks. This could certainly affect the final version of the Volcker Rule, which is slated to be completed as early as this summer. Whether the Volcker Rule would have prevented these losses is subject to debate. However, this incident may result in harsher final rules, which could more deeply affect the market-making businesses of major banks. This could particularly affect market-making revenues in less liquid products (many of which are credit related), where position risks and inventory hold periods are more of an issue. Treatment of hedging could be impacted, which could be a negative if it hinders banks from proper hedging.

Additional information is available on www.fitchratings.com.

 

To subscribe or visit go to:  http://www.riskcenter.com