TEXT-S&P comments on the weakness in capital markets revenues
(The following statement was released by the rating agency)
July 02 -
-- Standard & Poor's believes that the investment banking industry is undergoing a fundamental shift to a less profitable, but somewhat lower risk, business model.
-- Accordingly, we view the slowdown in capital markets revenues as more structural than cyclical.
-- In our view, the fragile macroeconomic environment is the primary factor currently weighing on the performance of banks' capital markets businesses.
-- We consider that the ongoing transition toward stricter regulation is a secondary, but still material, factor.
-- Our base-case assumption is now a 0%-10% decline in capital markets revenues in the 2012 full year relative to the 2011 outturn.
When the major global investment banks report their second-quarter earnings in the coming weeks, all eyes will be on the resilience of their capital markets revenues amid the weakening economic and market environment, Standard & Poor's Ratings Services noted in a report published today on RatingsDirect on the Global Credit Portal titled The Weakness In Capital Markets Revenues Appears More Structural Than Cyclical Their aggregate return on capital currently lags their cost of capital by a distance, and we believe that a key question currently facing the industry is whether this is merely a temporary phenomenon.
Standard & Poor's believes that investment banks have yet to demonstrate that they can generate satisfactory and sustainable returns on capital while subject to tougher regulatory requirements and difficult funding conditions. More favorable macroeconomic conditions would support earnings growth, but we see significant short-term uncertainties. In addition, widespread deleveraging (not only by banks) in many countries could remain a drag on global GDP growth for some time to come. For 2012, our base-case assumption is now for capital markets revenues to decline by up to 10% in the full year compared to 2011.
We consider that a long-lasting improvement in performance hinges on the effectiveness of the restructuring measures that investment banks are taking to adapt their risk profiles, funding models, and expense bases to the emerging regulatory and market context. This multiyear transformation is a fundamental shift to a less profitable, but somewhat lower risk, business model, in our view, and it is difficult to envisage the industry earning materially more than its cost of capital. Accordingly, we think the slowdown in capital markets revenues is more structural than cyclical.
RELATED CRITERIA AND RESEARCH
-- Revised Market Risk Charges For Banks In Our Risk-Adjusted Capital Framework, June 22, 2012
-- For U.S. Banks, It's Finally Time For The Full Basel Rules, June 18, 2012
-- As Eurozone Stress Mounts, European Banks Enter A Crucial Phase, June 13, 2012
-- Basel 2.5 Increases The Squeeze On Investment Banking Returns, May 14, 2012
-- Earnings Have Rebounded, But Much Remains Uncertain For Large Complex Banks And Trust Banks In The U.S., May 7, 2012
-- What's Behind Our Ratings On The Top 37 Banks Following The Application Of Our New Criteria, Dec. 2, 2011
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- For Universal Banks, The Recent Dominance Of Investment Banking Is Giving Way To More Balanced Earnings, June 30, 2011
-- Industry Risk For Investment Banking Is Generally Higher Than For Other Financial Institutions, Jan. 6, 2011
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