|
Fixed income bright light for banks
|
 |
November 9, 2001: 2:10 p.m. ET
Investment banks continue to suffer, AmEx unsure where to move in NY.
By Staff Writer Luisa Beltran
|
NEW YORK (CNNmoney) - The terrorist attack exaggerated an already bad market for financial services firms but a few bright spots are emerging, analysts said.
Investment banks and brokers were already feeling the pinch of an economic downturn in September when the terrorist attack caused them to lose four days of trading.
The dual attack on the World Trade Center and the Pentagon only exacerbated the economic malaise, said analyst Diane Glossman, of UBS Warburg.
Investments banks didn't make up the volume lost from the week of no trading but are showing an upturn. "We are recuperating from an extreme slowing that we experienced over the summer," Glossman said. "We were expecting the markets to pick up some and they have."
Fourth quarter is normally one of the busiest for banks and brokers but overall activity is still way down. So far, the volume of announced U.S. mergers has dropped 34 percent this year with 6,249 deals raising $667 billion. Last year at this time, 9,640 transactions raised $1.53 trillion, according to data from Thomson Financial.
IPOs are also crawling. So far this year, new issue volume is down 83 percent with only 70 companies going public, raising $110 billion, according to Dealogic, a New York-based investment banking research firm.
Morgan Stanley and Goldman Sachs, each top financial advisors on mergers, both reported declining profits due to steep declines in equity trading and investment banking activity.
"Investment banks are still reeling from the World Trade Center attack," said analyst Meredith Whitney, of Wachovia Securities. "There is no real liquidity in the equity markets because people are still very skittish."
But firms with a strong fixed income desk, such as Lehman Brothers and Citigroup's Salomon Smith Barney, have actually benefited, said UBS's Glossman. Earlier this week, Federal Reserve issued its 10th rate cut, which will further help the fixed income business.
In September, Bear Stearns (BSC: up $0.45 to $58.70, Research, Estimates) reported a 27 percent decline in profits but still managed to come in ahead of Wall Street's expectations.
In September, Lehman (LEH: up $0.71 to $67.26, Research, Estimates) reported a 32 percent drop in third quarter income. However, the firm's fixed income revenue rose 19 percent while investment banking revenues dropped 16 percent and capital markets revenue declined 25 percent.
"Everyone has been harmed by the [terrorist attack]," Glossman said. "But fixed income has been the bright light of the businesses."
Online brokers
Online brokers experienced a surge in volume when the markets reopened and managed to make up ground lost from the slow summer months, said analyst Rich Repetto of Putnam Lovell Securities Inc.
Of the discount brokers, Charles Schwab Corp. withstood the downturn the best. San Francisco-based Schwab, the nation's largest discount stock broker, in October beat third quarter estimates by a penny.
Schwab (SCH: up $0.38 to $15.13, Research, Estimates) shares also hit a low on Sept. 21 of $9.50 but they have since surged 55 percent.
"When markets reopened Schwab saw good activity and volatility for the last half of September," said analyst Joel Gomberg, of William Blair. "It was better than expected."
E*Trade Group Inc., the No. 2 U.S. Internet brokerage, also managed a break-even performance. Third quarter profit rose 29 percent as the broker beat expectations by a penny. E*Trade (ET: up $0.27 to $8.53, Research, Estimates) hit a low of $4.83 on Sept. 21 but has since gained 71 percent.
But trouble may be brewing. Rival TD Waterhouse warned earlier this week that quarterly profits would come in lower than expected due to a 40 percent drop in customer stock trades. More importantly, TD Waterhouse reported 92,200 average trades a day in October, down 12.9 percent from September.
TD Waterhouse (TWE: down $0.01 to $9.47, Research, Estimates) shares dropped to $6.45 on Sept. 21 but have since risen nearly 47 percent.
Trades in November were also averaging 85,000 a day which means the online broker is back to summer's slow levels, which doesn't bode well for the other brokers.
"While we fully expected the stocks to rebound well before their fundamentals, we believe the scenario has now reversed to a potential overbought scenario," Repetto said in a research note.
Also, the retail investor has yet to return to capital markets and there is no sign of when trading activity will pick up, analysts said. The brokers have all instituted cost-cutting measures to withstand the downturn.
"They just have to hunker down and reduce expenses so they can benefit from increased trades," Repetto said.
Back to the World Financial Center?
The WTC attack caused many companies -- particularly Lehman Brothers, American Express and Merrill Lynch -- to abandon their headquarters.
Lehman Brothers (LEH: up $0.71 to $67.26, Research, Estimates) has been operating from its backup offices in Jersey City.
"We have a fully functioning equity and fixed income, sales and trading facilities," company spokesman Jason Farago said. "We really haven't been working out of cardboard boxes and folding tables."
Over the next several weeks, Lehman plans to move its offices to the former Morgan Stanley building in Times Square, Farago said.
The terrorist attack in September destroyed the towers of the World Trade Center but some of the buildings in the World Financial Center (WFC) were unscathed. The WTC is across the street from the WFC.
Merrill Lynch (MER: up $0.21 to $48.89, Research, Estimates) started moving back into its building at 4 WFC late last month and will be back into 2 WFC by March of 2002, a spokeswoman said.
"Every building in the World Financial Center is standing," the spokeswoman said.
Meanwhile, American Express still has yet to move back to its digs in 3 WFC and doesn't know where it will go, company spokeswoman Judy Tenzer said.
AmEx's headquarters at 3 WFC were heavily damaged. Employees have since been working at locations at 40 Wall Street, Jersey City and Parsipanny, N.J. and Stamford, Conn.
AmEx (AXP: up $0.32 to $32.72, Research, Estimates) still doesn't know where it will place its headquarters. "We are committed to New York but it's too early to tell where we will be," Tenzer said. 
|
|
|
|
|
|
|
