Despite the volatility and uncertainty hanging over global financial markets, the outlook for both North American and European securities firms remains neutral for 2023, according to a new report by Fitch Ratings.
The rating agency said that the sector’s strong capital position and robust liquidity will help offset the negative effects of rising interest rates and elevated macroeconomic uncertainty.
It noted that global market and interest rate volatility could preserve the fairly supportive backdrop for trading activity among broker dealers, interdealer brokers (IDBs), and market makers.
Meanwhile, higher rates will continue to be a tailwind for retail brokers and wealth management firms, which typically have more rate-sensitive balance sheets.
“Securities firms will face profitability headwinds in 2023 as investment banking activity will likely be suppressed given elevated global recession risks and market volatility,” said Bain Rumohr, senior director with Fitch.
He added, “Still, elevated trading activity and higher rates should support volumes and overall operating performance of the sector, which should allow firms to maintain appropriate leverage and liquidity profiles next year.”
However, there were also problems on the horizon. The report noted that ongoing technological shifts, increased trading volumes, and asset price volatility could cause operational challenges for securities firms next year.
In addition, recent issues seen in the digital currency space, such as at FTX and peer firms, will have limited direct impact on rated securities firms, given such activities are largely confined to small and/or ring-fenced activities at high frequency trading firms.
However, the recent turmoil in the crypto sector should have limited direct effects on securities firms, it said, “given such activities are largely confined to small and/or ring-fenced activities at high frequency trading firms.”
