Bank Earnings: Q&A with Daniela Sabin Hathorn of Capital.com

As the big banks report bumper earnings, Global Banking & Finance Review spoke with Daniela Sabin Hathorn, Senior Market Analyst at Capital.com to get her expert analysis on what the figures mean for the markets.

Q3 reporting for the major banks is much stronger than expected, what are the driving factors behind this?

Two drivers have done most of the work: a sharp rebound in investment-banking fees and a healthy market revenue, especially in equities trading. At the same time, credit costs have stayed contained and, and for some franchises, NII held up or even improved, rounding out broadly better-than-feared prints.

Many analysts are reporting a ‘rebound in investment banking and trading’ – can you provide any further context?

There has been a reacceleration in M&A activity with reports of $1.26T of global megadeals in Q3 (2nd-highest Q3 on record). However, despite this record value, the number of deals signed was low, which suggests a value over volume situation. On the trading side, the strong performance in global equity markets has led to higher trading revenues. For example, Morgan Stanley reported equities revenue up 35% y/y and a strong underwriting activity, illustrating how higher volumes, and a friendlier primary market lifted results.

One outlet described the results as ‘mixed but promising results for the financials sector’ – do you agree, and why?

The outlook is promising because top-line beats are broad, and several banks are talking up merger and client activity. However, some headwinds remain. NII is not uniformly strong as it depends on deposit mix and the future pace of Fed cuts, as well as a slight increase in expenses reported in some places. Furthermore, it is also important to note that there is a growing divergence between Wall Street and Main Street as markets business is thriving while some consumer metrics look softer, which could weigh on future returns.

Any further predications/context you can share?

How the M&A sector evolves given its current strength: a steady calendar into Q4/Q1 would keep fees firm. The pace of rate cuts and its effect on NII: If the Fed decides to cut rates more aggressively then there could be a margin squeeze for banks.

How trading conditions evolve: Volatility and risk-on sentiment will continue to power positive returns for the trading sector. If these dry up, the margins could drop.

Daniela Sabin Hathorn is a Senior Market Analyst at Capital.com