Wall Street to capitalize on rate cuts

As interest rates decline, Wall Street is poised to profit from rising fee revenues, says Fitch Ratings.

In a report published Friday, the rating agency said the third-quarter results for the 21 largest U.S. banking groups signal that the sector’s revenue environment has started to improve amid easing financial conditions.

Revenue growth was flat or positive at most of the banks in the most recent quarter, led by gains in non-interest income, while net income improved at roughly half of the banks, Fitch said.

“Falling interest rates have bolstered fee income from investment banking and wealth management and are likely to support a recovery in loan growth,” the report said.

The large Wall Street banks saw continued growth in their investment banking activity last quarter, particularly in debt underwriting, the report noted.

“In aggregate, investment banking revenues increased by more than 30% [year-over-year] at the five [global banks], supported by healthy backlogs of planned debt and equity issuance,” Fitch said.

Similarly, sales and trading revenues “remained robust,” with revenues up 7% year over year in aggregate across the banks.

While loan growth was weak in the third quarter, it stayed positive, and net interest income ticked higher across the group, the report said.

Alongside these revenue improvements, Fitch noted that deposit trends and asset quality are also stabilizing as rates ease.

“[D]epositors have clearly slowed their yield-seeking behaviour, with the [quarter-over-quarter] contraction of non-interest-bearing deposits at its lowest level in two years,” the rating agency said, while credit costs and asset quality metrics were largely stable last quarter.

“Banks continued to warn of further charge-offs in office commercial real estate. However, lower rates should reduce stress across other asset classes, including multifamily [real estate].”

The banks also limited their expense growth in the third quarter and reported healthy capital levels, the report said.