Fitch: Securities Firms Earnings to Remain Challenging in 2016

The market environment for securities firms across the globe will remain challenging in 2016 due to prolonged weak trading results in Fixed Income Currency and Commodities (FICC) trading businesses, according to Fitch Ratings' 2016 Securities Firms Outlook report.

While Fitch's global sector outlook for securities firms' remains negative, the Rating Outlook is Stable due to the maintenance of solid capital and liquidity levels, more focused business models for the larger firms, and a stabilizing regulatory environment. Given this, Fitch has largely Stable Rating Outlooks for the larger firms in North America and EMEA whose ratings already incorporate some of the negative pressures on the sector.

Advisory and underwriting businesses should continue to be strong in 2016. However, the potential strength will not be enough to relieve overall earnings pressure as the markets businesses are likely to remain challenging.

Fitch expects the larger firms will continue to focus on cost cutting and the optimization of their client base, shedding customers that absorb their balance sheet capacity without generating sufficient returns. This in turn may create opportunities for smaller players that are well positioned from a capital level standpoint to pick-up the higher risk customers.

In 2016, Fitch expects inter-dealer brokers (IDBs) to continue to diversify their revenue and customers towards more non-bank market participants including hedge funds and asset managers. IDBs will move towards competing in an 'all-to-all' market amongst technology firms, exchanges and clearing houses rather than the more traditional 'dealer-to-dealer' space. Reflecting the secular decline in trading volumes, Fitch is already observing consolidation in the IDB space in an effort to achieve greater cost/scale efficiencies.

Retail brokers are perhaps best positioned amongst securities firms, given their likely benefit from an interest rate hike and continued expansion into banking and advice/asset management activities. However, Fitch's view is that any rate hike will be gradual and incremental thus having a slow impact on profitability for retail brokers.

While earnings pressure will be an issue across the securities firms sector next year, a stabilizing regulatory environment will add clarity to the sector and allow firms to make more informed strategic decisions. The larger firms will likely continue to look for ways to lower their capital requirements by optimizing their funding profiles and Fitch expects the largest securities firms will be in compliance with future Total Loss Absorbing Capital (TLAC) requirements when they are finalized.

The full report '2016 Outlook: Securities Firms' is available at 'www.fitchratings.com.'

Additional information is available at 'www.fitchratings.com'.

2016 Outlook: Securities Firms (Difficult Macro Environment Impacting Sector Outlook)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873672

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