Fixed-Income Strength Key in US Banks 1Q Results

Solid capital markets revenue trends continued for the largest U.S. banks in the first quarter, and robust fixed-income markets again provided much of the top-line support, according to Fitch. Vibrant bond market activity and tight spreads were the key factors contributing to big sequential revenue gains in both the all-important fixed-income, currency, and commodities (FICC) trading revenue category and investment banking.

Aggregate capital markets revenues for the five-largest U.S. global trading and universal banks (GTUBs) rebounded by 36% from a seasonally weak 4Q12. The total declined 7% year over year from an especially strong 1Q12, when ECB liquidity operations spurred a snapback in the European bond market and a broad expansion of global risk appetite.

FICC revenue strength has continued in spite of the fact that global regulation (including Basel III and the forthcoming Volcker Rule) is making it more difficult for big banks to expand trading activities. JP Morgan, Bank of America, Citigroup, and Goldman Sachs all reported resilient FICC results in the face of increased regulation. At the same time, some smaller players (including Morgan Stanley and some foreign banks) are more actively shedding their U.S. FICC trading operations and focusing on core strengths.

The U.S. GTUBs reported healthy sequential trading revenue growth in 1Q. Compared with 4Q12, aggregate FICC revenues increased by 64% in 1Q for the top-five banks but were down 13% from robust year-earlier totals.

Besides FICC, an area where fixed-income trading drove the bulk of sequential growth, still-strong debt markets contributed to somewhat better underwriting revenue performances in the large banks' investment banking units. Debt underwriting revenues accounted for more than half of aggregate investment banking revenues for the top-five banks in 1Q and grew by 23% year over year, as bond issuance remained very strong in the quarter.

Capital market revenues are inherently volatile and can swing dramatically quarter to quarter, particularly when market conditions change quickly. Global market sentiment remains vulnerable in light of economic weakness in Europe; fiscal drag and deficit concerns in the U.S.; and broader global growth worries. Any change in the direction of U.S. monetary policy potentially involving a scaling back of Fed bond purchases could have big implications for financial markets and revenue generation for the largest trading banks.

For a closer look at the primary drivers of 1Q13 U.S. banks' capital markets revenue, see the special report "U.S. Banking Capital Market Update: 1Q13," dated April 19, 2013, atwww.fitchratings.com.

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