TEXT-Fitch: GTUBs' earnings slightly improved;balance sheet strengthening continues

Wed Dec 19, 2012 8:12am EST

Dec 19 - Fitch Ratings has published the latest in series of quarterly reports on the performance of its Global Trading and Universal Bank (GTUB) peer group. The report observes that balance sheet strengthening continues, while earnings for Q312 was mixed but generally showed a slight improvement on Q212 and substantially better than the weak third quarter last year.

The improvement came from some degree of pick-up in trading volumes in fixed-income, currency and commodities (FICC), but Q312 was a slow quarter for equities and generally the level of market activity remains low. According to Fitch, securities trading volumes will only start to pick up notably once investor confidence is restored by more certainty about economic prospects. The same investor confidence drives activity and prospects for wealth and asset management as well as loan demand in commercial banking businesses. Answers will need to be found to the eurozone crisis and US fiscal cliff concerns before confidence can be restored.

The agency observes that several of the GTUBs have been hit with substantial settlement charges in 2012 and it would be unrealistic to assume that the worst is over for the industry. The complexity of business models and products contributes to litigation risk and multiplies the potential "unknowns" that can emerge from ongoing regulatory changes, especially at multiple national levels. The GTUBs are highly sensitive to reputational risk, which makes it imperative to tackle emerging litigation and regulatory issues sooner rather than later.

Consistent among the GTUBs is the ever-increasing focus on costs, particularly as revenue prospects are proving more difficult to predict, given the shifting regulatory landscape. It will be well into 2013 before cost benefits come through in bottom lines for most GTUBs, although some are more advanced than others. In the meantime, the banks grapple with upfront costs incurred as businesses are restructured, which add to the substantial additional costs of building infrastructure to comply with more rigorous regulatory requirements.

The GTUBs continue to build capital and liquidity buffers as they prepare for Basel III implementation. The quality of capital is also improving, with a strong bias to common equity, and liquidity buffers at these banks now comprise primarily 'AAA' government securities and cash. These pools in most cases will enable the GTUBs to ride out a severe economic downturn for at least a year without having to take much - if any - action. Arguably, the current low-growth environment makes holding liquidity an obvious choice. However, substantially more rigorous regulatory pressure suggests robust liquidity buffers are here to stay.

Link to Fitch Ratings' Report: Global Trading and Universal Banks Review: Q312

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