Moody's: Global investment banks 2018 outlook changed to positive as profitability improves, underpinned by broadening global growth

Moody's Investors Service has changed its outlook for global investment banks (GIBs) from stable to positive in 2018, reflecting improving profitability, broadening global growth, declining tail risk and solid capital and liquidity. The outlook indicates a forward-looking assessment of fundamental credit conditions that will affect the creditworthiness of global investment banks over the next 12-18 months.

"Profitability will rise, especially in the US, while less so in Europe, as interest rates rise and legacy and restructuring costs subside," according to Ana Arsov, a Moody's Managing Director responsible for the global investment banks' ratings. "Market disruptions or asset price shocks stemming from unexpected changes in monetary policy remain a tail risk, but our expectation is for a well telegraphed and gradual approach by central banks over the outlook period which would be supportive of financial stability."

 

Other factors driving the positive outlook for 2018 include the emergence of operating leverage even as revenue pressures continue. Continued focus on expense discipline will allow for positive operating leverage at more firms, Moody's says.

Capital markets revenues remain pressured from low market volatility which is adversely affecting client flow in both equities and fixed income. And despite robust equity markets, equities sales and trading revenues have continued to decline due to ongoing competitive pressures.

However, Moody's expects these ongoing markets pressures to be offset by strengthening investment banking revenues on back of a broader positive outlook for the global economy, and by higher interest rates which will lead to improved net interest margins (NIMs) for core funded banks and potentially higher revenues in fixed income sales and trading. With the US Federal Reserve rate hikes underway, and rate hikes by other central banks expected to lag, "we expect US firms will benefit more, along with other GIBs with US businesses, from the expected interest rate increases," Arsov noted.

GIBs will also experience a decline in legacy tail risks as most European non-core units continue to unwind, with most closing by the end of 2018. Lower tails risks at US GIBs has been evidenced by generally decreasing losses associated with the US Federal Reserve's annual stress tests.

On the back of improved capital ratios and more resilient stress testing results, the Federal Reserve has signaled a greater comfort with higher pay-outs for all US GIBs as long as the bulk is completed through share buybacks. European GIBs are likely to see considerably lower pay-outs, but higher dividends are expected for some.

"On the whole, the industry balance sheet is safer, bolstered by the enhanced post-crisis regulatory framework," says Arsov. "While some policymakers are contemplating revising some regulations to foster greater economic growth, we do not expect potential regulatory changes to undermine the GIBs' creditworthiness."

In the US, regulatory changes are expected to reduce GIBs' compliance costs, while in Europe, Moody's anticipates a longer transition period for regulatory rules not yet finalized, but otherwise, no significant reversals.

Powered by Capital Market - Live News