First quarter revenue growth for global investment banks is forecast to rise 10 per cent year-on-year - and 5 per cent for the full 2017 year - as an uptick in business confidence and steeper yield curves fuel client activity.
According to Standard and Poor's, a continued culture of cost discipline should also help banks feed top-line growth through to earnings, which all investment bankers will post shortly. This is heartening since revenue growth for the world’s investment bankers has fallen for four straight years.
While the ratings agency is not anticipating a dramatic near-term improvement in the profitability of banks' capital market activities, it should strengthen - and become less of a drag on overall returns.
“In our view, the main risk to this benign outcome is a market correction that might be triggered if, for example, the global economy loses momentum or there is an unexpected geopolitical event," said S&P.
Capital markets activity is quite seasonal, the ratings firm added, and the first quarter is usually the strongest period, but 2016 bucked this trend as economic uncertainties caused January and February to be quieter than normal.
“Comparisons with the first quarter of 2016 are therefore rather facile but, since this year got off to a much stronger start, we are expecting about 10 per cent year-on-year revenue growth in the first quarter of 2017.”
Clearly, the regulatory climate has shifted in recent months as President Trump's administration considers a recalibration of the US regime and European authorities push back against a strict interpretation of the so-called Basel IV package.
Geopolitical developments can create revenue opportunities as market participants take positions but also have potential to jolt investor confidence and sentiment, the S&P research found.
“Both the UK's vote to leave the European Union in June and President Trump's election in November contributed to the pick-up in fixed income activity in the second half of 2016 as investors repositioned their portfolios," it stated.
“Other than a fall in the pound, markets have taken the Brexit vote in their stride so far, but sentiment may waver as the terms of the UK's withdrawal are negotiated over the next two years.”
The ratings firm said UK investment bank earnings will depend on the final Brexit deal since that will determine the extent to which they are forced to relocate activities from their London hubs, leading to additional costs and capital inefficiencies.
Plus, the ‘Trump Trade’ opportunity appears to have leveled off, at least for the moment. This refers to the US election result which caused markets to rise in anticipation of higher government spending, tax cuts, and reduced regulation.
Looking ahead, the major scheduled geopolitical events this year include French and German elections as the outcomes could have a big influence not only on domestic policies, but also on the future direction of the Eurozone.
Policy changes could affect market activity, S&P analysts found. For example, incentives for new debt issuance could change if the US enacts proposals to unwind the tax deductibility of interest payments and facilitate the repatriation of cash held by US corporates in foreign subsidiaries.
The extended period of ultra-low interest rates and quantitative easing is ending and the picture is changing as central banks and investors respond to emerging reflationary trends.
Higher rates might discourage marginal debt issuance and acquisitions but positive economic growth should support overall new business flows, the ratings agency noted.
“The unwinding of the unprecedented monetary stimulus is unlikely to be smooth, however, and markets will likely fluctuate between 'risk-on' and 'risk-off' periods, in which investment activity changes in response to economic patterns.”
Plus, S&P argued that divergence between the interest rate cycles in the US and other economies could also lead to volatility in market pricing and capital flows, particularly in emerging markets.
All up, the rating firm’s central view is that industry revenues will grow by about 5 per cent this year.