DBRS Morningstar: Growth in Q2 Cap Market Revenues for European Firms; Credit Provisions Remain High

Q2 was another strong quarter for capital markets revenues at the European Banks with major capital markets activities (European Firms, including Credit Suisse Group, UBS Group, Deutsche Bank and Barclays). In the extremely uncertain and unprecedented Coronavirus pandemic (COVID-19) environment, capital markets results are offsetting the impact of the low rate environment, given these banks diversified business models. These Firms' revenues showed strong growth in Q2, similar to that of Q1. In this quarter, capital markets revenues benefited from very high volumes of corporate equity and debt issuance and sound trading activity. Volatility levels remained high in Q2, although lower than at the peak in March 2020, which drove client activity and resulted in strong sales and trading revenues growth year-on-year (YoY). This commentary focuses on the performance of the capital markets revenues (including Sales & Trading, Underwriting and Advisory) of the major European firms in Q2 2020.

Key highlights from DBRS Morningstar’s commentary include:
• European firms reported strong capital market revenues in Q2 supported by strong growth in Sales & Trading activities and record levels of equity and debt underwriting.
• Most banks' provisions for credit losses were lower in Q2 than in Q1 but still above pre-COVID-19 levels.
• RWAs reduced in Q2 helped by lower levels of corporate drawdowns, although they remained higher than Q4 2019 levels.

“European capital markets revenues showed once again strong growth in Q2 helped by extraordinary volumes of corporate equity and debt issuance and sound trading activity. However, these banks continued to be negatively affected by credit provisions in Q2 although these were significantly lower than in Q1 at most banks. In addition, corporate drawdowns at a lower level than in the previous quarter led to an overall reduction in risk weighted assets (RWAs) in the banks' capital markets divisions. This partly offset the RWA increase caused by corporate rating migration in the quarter driven by the effects of the COVID-19 crisis” said Maria Rivas, Senior Vice President from the DBRS Morningstar Financial Institutions team.