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As the major Wall Street banks start to report their third quarter results, shareholders should brace for a decline in their investment banking revenues, says Moody’s Investors Service.

In a new report, the rating agency said that the large U.S. banks, which begin reporting on Oct. 14, are expected to reveal year-over-year reductions in their investment banking revenues that are “credit negative” for them.

Moody’s said that based on its analysis of both capital market and merger and acquisition activity levels, it’s anticipating a drop in revenues from these businesses.

In particular, on the heels of a record-breaking 2021, equity market issuance — both initial public offerings and follow-on deals — plunged as market volatility spiked and valuations dropped.

Additionally, M&A was down substantially on a year-over-year basis, it noted.

Demand for both investment grade and high-yield debt has dropped too, as rates rise and credit spreads widen, Moody’s reported.

“Financial conditions in the third quarter continued to tighten, contributing to year-over-year declines in primary capital markets issuance volume and transactions, which will significantly reduce investment banking fees,” it said.

While investment banking revenues are expected to drop, Moody’s said that sales and trading revenue “will likely remain robust,” as secondary trading volume, market volatility, and bid/ask spreads are elevated compared to last year. Equity options trading volumes also remain near record highs, the report said.

“Increased trading activity by market participants boosts client flows to large banks,” it said. “Wider bid/ask spreads increase revenue capture on each trade for nimble and opportunistic banks that are willing to provide market liquidity.”

At the same time, heightened market volatility also creates demand for risk transfer, “which banks can intermediate profitably,” Moody’s said.

“However, if events worsen and volatility becomes extreme, then client activity could dry up,” it cautioned.