At the start of 2025, market expectations were high that this would be the year banks delivered stellar capital markets results, driven by a rebound in advisory revenue. Such expectations were driven by a combination of projected solid economic growth; easing regulatory constraints; and pent up demand after years of lackluster deal making.

But now with the first quarter in our rear view mirror, these expectations have faded, replaced by a high level of business uncertainty in the aftermath of the implementation of tariffs and the possibility they will remain in place for an extended period. Also, given the steep change in market valuations, we believe risks are elevated and we are watching closely, among other things, the need for counterparties to raise liquidity amid higher margin requirements.

The one bright spot within capital markets activity seems to be the level of trading activity. Indeed, uncertainty regarding the implementation of tariffs and policymaking has elevated market volatility, which has in turn increased demand for trading volume as market participants reposition their portfolios amid a changing economic landscape. Positively, trading revenue represents the bulk of banks' capital markets revenue, and so despite continued weak deal volume, we still expect 2025 capital markets revenue to be in the range of last year's solid level.

Capital markets revenue is an important consideration in the credit profiles of many of the largest banks we rate because it helps drive profitability, particularly when spread income is challenging. At its best, capital markets activity helps a bank diversify its revenue stream. It also helps a bank synergistically, acting as a fulcrum to spur on new business initiatives. However, capital markets activity, particularly trading, also adds an element of risk to a bank's credit profile because it is largely more opaque and complex than a bank's other business activities.

(In this article, we reviewed the banks with the largest capital markets activity.)

The Largest Banks' Capital Markets Performance

For banks with the largest capital markets activity, looking at a December year-end reporting date, capital markets revenue increased by roughly 15% in 2024--above the upper band of our forecast for last year of flat to up to 10%.

All categories--(fixed income, currencies, and commodities [FICC] and equity trading, advisory, and debt and equity underwriting--rose in 2024. Debt and equity underwriting posted the highest year-over-year gains (47% and 55%, respectively), spurred on by central banks cutting interest rates and strong market performance (the S&P 500 Index was up over 20% in 2024).

Although advisory and equity underwriting rose year over year, performance was still well below historical levels as a more stringent regulatory environment, along with market uncertainty due to both geopolitical and election uncertainty, weighed on the performance of these two capital markets segments.

Chart 1

Capital markets projections for 2025

• Our expectation is for capital markets revenue to be in a range of down 5% to up 5% compared with 2024, with risk to the downside should a global recession occur or investment banking activity materially drop. Notably, our economists have recently increased the subjective probability of a recession in the U.S. over the next 12 months to 30%-35% from 25% in March.
• The duration of tariffs and their economic implications will be a major factor in the levels of capital markets activity. Prolonged tariff wars that curtail economic growth and suppress market levels could be a major headwind to capital markets activity, particularly investment banking.
• GDP is also a major factor in determining the level of capital market activity. Earlier in the year, with the onset of tariffs, our economists lowered their growth projections for certain major economies from where they stood at the beginning of 2025.
• In the aftermath of the "Liberation Day" round of tariffs, our economists pointed to downside risks to our current macro baseline forecast, and for global economies, and stated "we are likely to revise downward our GDP growth forecasts relative to our existing baseline" (see ""Liberation Day" Tariff Announcements: First Take On What It Means For U.S. And Global Outlook," published April 3, 2025, on RatingsDirect).(Note : S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As situations evolve, we will gauge the macro and credit materiality of potential shifts and reassess our guidance accordingly [see our research here: spglobal.com/ratings]).
• Continued market volatility, along with asymmetric timing of rate cuts across regions, should spur demand for trading activity, particularly interest rate and foreign exchange trading.
• FICC financing is typically included to various degrees within FICC trading results. FICC financing has benefitted from the rapid acceleration of alternative investment strategies and the growth in private credit. Growth this year will depend on whether the markets can gain traction in the aftermath of the selloff after the latest round of tariffs was announced.
• The first quarter of the year is generally the most robust in terms of capital markets revenue. Based on company comments at conferences, the outlook for capital markets revenue for first-quarter 2025 looks solid.
• Banks expect trading--the largest component of capital markets revenue--to be higher but have provided mixed messages regarding investment banking (advisory, equity, and debt underwriting).
• In addition, 2024 advisory and equity results were relatively low on a historical basis, making for less challenging year-over-year comparisons.

Chart 2

Individual Bank Capital Markets Performance

All of the banks we surveyed grew their capital markets revenue in 2024. UBS and Morgan Stanley had the largest capital market revenue growth at over 15%, spurred in part by higher trading revenue.

Chart 3

Capital markets revenue breakdown

• Banks with well-diversified capital markets businesses are better able to adapt to the ever changing conditions within capital markets.
• Banks that focus on only a portion of the capital markets revenue stream may be more subject to higher capital market revenue volatility, all else being equal.

Chart 4

Capital markets revenue volatility

• Banks with simpler, more diverse capital markets businesses will likely generate capital markets revenue that is more stable.
• Banks that focus largely on clients within their own lending base should also post steadier capital markets revenue.
• Banks that have changed their strategic plans in regard to capital markets revenue (either deemphasizing or further emphasizing this business line) could also see higher volatility because these changes will sway annual revenue.

Chart 5

Capital Markets--Market Share

Changes in market share were modest across banks in 2024 versus the previous year, and U.S. banks continue to dominate.

However, non-U.S. banks seem to have established solid ground within the capital markets space after having refocused their businesses on areas where they have a competitive advantage (see "Banking Brief: Europe's Leaner Investment Banks Have Stabilized Their Market Share," March 4, 2025).

Chart 6

Capital markets revenue as a percentage of total revenue

• In 2024, banks' capital markets revenue rose modestly as a percentage of total revenue due to a combination of the strengths of their capital markets activity and more modest net interest income growth in the aftermath of interest rate cuts.
• The median percentage among the largest banks of capital markets revenue to total revenue was 35% last year, up from 32% in 2023.
• This year, we expect capital markets revenue as a percentage of banks' total revenue to be relatively flat to up modestly from last year.

Chart 7

Risks

We believe banks' capital markets businesses are more opaque than traditional lending businesses, and the risks are more difficult to quantify. We look at various risk metrics within banks' trading businesses to gauge whether risks are elevated, but our lens to determine the risks of these businesses versus traditional lending business is more limited.

Based on our observations, last year, trading risks remained in check. This has generally been the trend since the Great Financial Crisis in which banks changed their activity within trading, acting as intermediaries rather than conducting propriety trading. Indeed, there have been relatively few blips, although the collapse of Arechegos Capital Management in 2021 shines a light on how quickly and unexpectedly bank trading losses could materialize. In our opinion, recent market volatility in the aftermath of tariff implementation has elevated trading risks versus last year.

Given the steep change in market valuations, we believe risks are elevated this year and we are closely watching many aspects within capital markets activity, including counterparty risk, particularly the ability of counterparties to post margin. During the last steep drop in market prices (during the COVID-19 pandemic), margin posting worked smoothly. That said, each market environment is different. We believe the need to unwind collateral due to an unfulfilled margin call, should it occur, would cause significant market disruption and raise further concerns regarding the ability of other counterparties within the banking space to meet margin calls. This would, in turn, pressure the market and banking industry. At present, our base case is that margin calls will continue to function smoothly, since many financial players likely deleveraged in anticipation of tariffs.

The level of market risk-weighted assets relative to trading assets

• A low level of market risk-weighted assets relative to trading assets would indicate that the bank's trading activity is lower risk. An increase in this ratio could indicate a riskier trading book.
• The results of this analysis for year-end 2024 are largely favorable, with market risk as a percentage of trading assets either declining modestly or remaining flat for most banks, indicating less risky market conditions, and/or less risky trading asset holdings.

Chart 8

Level 3 trading assets to capital

• All else being equal, a large proportion of level 3 assets (assets whose prices are model driven due to a lack of market transparency) possibly exposes banks to mispricing and to a future revision of the assumptions underpinning the valuation of these assets. Level 3 assets are also less liquid than other assets and could be susceptible to significant price volatility.
• Positively, the amount of level 3 trading assets and derivatives as a percent of capital remains well below precrisis levels and for most banks declined in 2024.

Chart 9

The Creditworthiness Of Derivative Counterparties

Banks still face counterparty risk on over-the-counter (OTC) derivative trades. Although margin requirements can reduce that risk, some trading partners (certain sovereign and corporate clients) may be exempt from those. If a counterparty were to default on a derivative receivable, the bank may experience large losses from the credit exposure. In addition, it may simultaneously suffer losses on any positions it used the derivative to offset or hedge.

For banks that publicly report the credit quality of their counterparties, the amount of speculative-grade exposure remained largely stable in 2024. Derivative receivables outstanding (after netting) remained largely in line with the previous year. This risk in particular in today's steep market selloff could expose banks to losses should a counterparty fail and the margin it posted to a bank prove insufficient. The unwinding of that margin would likely lead to further price declines, and the bank would be exposed to a trading position without a congruent hedge.

Chart 10

Ratings Of Capital-Market-Intensive Banks

From a ratings standpoint, we believe a bank's capital markets revenue is more volatile and difficult to predict, in our view, and it often carries greater risks than its lending activity. However, when capital markets activity is done in a prudent manner, and if it's not outsized in terms of a bank's revenue stream, revenue derived from the capital markets can complement that bank's business model. At the same time, an overreliance on capital markets revenue can weigh on bank ratings.

Of the banks we rate with large capital markets activity as a percentage of revenue, we don't score any of their risk positions above adequate. That said, we raised the rating on JPMorgan Chase & Co. (JPM; A/Stable/A-1) by one notch last year, reflecting, among other things, the bank's ability to deliver solid results in varied economic conditions, helped by its strong capital markets franchise. JPM now has one of the highest group stand-alone credit profiles of the banks with large capital markets operations.

Related Research

• Banking Brief: Europe's Leaner Investment Banks Have Stabilized Their Market Share, March 4, 2025
• Systemic Risk: Global Banking Regulation At A Crossroads, Feb. 18, 2025
• Systemic Risk: U.S. Banks' $1 Trillion In Loans To Nonbanks, Like Private Credit, Creates Risks And Rewards, Feb. 18, 2025
• Capital Markets Revenue Could Improve In 2024 On Rebounding Investment Banking, Though High Rates May Still Hamper Results, April 24, 2024
• Research Update: JPMorgan Chase Outlook Revised To Positive On Franchise Strength And Ability To Deliver Solid Results; Ratings Affirmed, April 1, 2024