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BusinessWeek: January 10, 2000 |
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Industry Outlook 2000 -- Finance
Securities
Last year, investment banks and brokerages recovered nicely from 1998's twin setbacks--Russia's debt default and the near-collapse of the hedge fund Long-Term Capital Management. For New York Stock Exchange members, pretax profits for 1999 are expected to be a record $12.6 billion, up 29% from '98, the Securities Industry Assn. estimates. For all 7,300 broker-dealers, profits are expected to top $22 billion. One secret to the industry's success in '99 is that it held the line on expenses, which rose only 1%, to $162.8 billion. Meanwhile, the industry kept raking in commissions and fees. It took in a record $30 billion in commissions, up 16%. The red-hot initial public offering market also produced a record $15.3 billion in underwriting revenue. And fees from asset management grew 19%, to $10.7 billion. GIMMICK. Execs are counting on a continuation of the Internet IPO gold rush. Some industry experts also predict that more companies will issue shares than did in '99, many of them focusing on business-to-business e-commerce opportunities. Action on mergers and acquisitions could increase too, much of it driven by a Financial Accounting Standards Board proposal to ban, by the end of 2000, an accounting gimmick called "pooling of interests" that lets companies combine their book values in a merger. This practice enables companies to inflate earnings by not writing down goodwill. "Anyone who wants to use their shares as currency to do deals will likely pursue a transaction in 2000," McVey predicts. Passage of financial services reform legislation, combined with the end of pooling, could make 2000 the year of the deal. Look for more mergers, but also a bundle of strategic partnerships, such as the just-announced agreement between Citigroup and State Street Corp. to manage corporate 401(k) plans. Such deals bring competitive clout. And Citigroup has another built-in advantage: offices in 100 countries. After being a drag on profits for the past several years, overseas operations at most securities firms are expected to be strong income generators in 2000. Japan finally is showing signs of life, as are many Asian economies. But Europe is the region that is picking up the most steam: In the third quarter of '99, European M&A activity grew 300%. So what will the securities industry's dark spot be in 2000? No doubt, online brokers will continue to wreak havoc. In 1999, the number of online retail customers increased 60%, to 10 million. That's up from just 1 million in 1996. By the end of 2000, the number of online accounts could grow to 15 million, predicts Scott Appleby, senior e-finance analyst with San Francisco-based BancBoston Robertson Stephens Inc. Online customers now are responsible for some 20% of total daily volume on the stock exchanges, which are also losing business to newfangled electronic trading systems. But after causing turmoil for Wall Street's establishment, the online industry can expect to face some upheaval of its own. Appleby thinks the 75 or so online brokers will spend the next few years consolidating, with such heavily marketed firms as E*Trade Group Inc. and Charles Schwab Corp. as the buyers. Sellers might include Ameritrade, National Discount Brokers, and Datek Online. "I expect to see a shakeout," Appleby says. As traditional Wall Street brokerages charge online, competition will grow even more intense. Make that one more reason 1999 will be a tough year to beat. Return to top | |
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  Return to top TABLE Positives and Negatives POSITIVES -- Passage of financial-services reform opens new expansion opportunities in 2000. -- The global economic recovery and an M&A boom outside the U.S. should restore profits to investment banks' overseas branches. NEGATIVES -- High compensation costs and rising interest rates could hurt margins in 2000, especially if profits decline and the stock market swoons. -- Electronic markets and Net brokers could keep eating into traditional firms' franchises. Return to top |
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