Profit Surge Helps to Make Case for Worth of Bank Brokerages

By Kimelman, John | American Banker, March 1, 1996 | Go to article overview

Profit Surge Helps to Make Case for Worth of Bank Brokerages


Kimelman, John, American Banker


###JOHN KIMELMAN

At a time when bank executives are scrutinizing their retail brokerage activities more closely than ever, these businesses are beginning to put up some pretty good numbers.

Spurred by strong sales of stock mutual funds, 15 large brokerage units tracked by consultant Kenneth Kehrer boosted their operating profit margins to 35% in last year's fourth quarter, from 25% a year earlier.

He estimated the banking industry earned roughly $900 million last year from the brokerage business.

Though several bankers attending the Bank Securities Association conference questioned the optimism of Mr. Kehrer's assessment, few denied that an indisputably stronger 1995 will help them in their battle to prove their worth to senior executives.

"In the past, our brokerage unit was viewed purely for its value in distributing products," said Wayne Wilson, president of Portland, Ore. based U.S. Bancorp Securities. "Now the primary standard I'm held to is profitability."

U.S. Bancorp's heightened interest in brokerage earnings is illustrative of a transformation occurring at banks across the country.

In the early and mid-1980s, most banks opened discount brokerages simply to keep their traditional deposit customers from walking out in search of higher returns.

But as these brokerages have evolved into full-fledged operations offering mutual funds, annuities, and financial advice, bank executives have begun to keep a closer eye on the bottom line.

Because much of a brokerage's cost structure is tied to sales, rather than being fixed, these units have had little trouble earning some money from fees and commissions for their banks. The problem is that these profits pale next to income earned from commercial or consumer lending, and even trust and private banking.

Brokerage earnings contribute less than 1% to the industry's total bottom line, according to the Federal Deposit Insurance Corp. That makes them "fairly low on the radar screen," according to Joseph Duwan, an analyst at New York-based Keefe, Bruyette & Woods.

Mr. Kehrer, president of Kenneth Kehrer Associates in Princeton, N.J., said that the 47 brokerages he follows for an annual study contributed only $546 in profits per $1 million of bank deposits in 1994. …

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