Beating the Blitz; This Year's Profits Upstage Bad Publicity in the Securities Industry
Albert, Andrew, American Banker
HEADLINES AND bottom lines tell two entirely different stories about the performance of the securities industry this year.
Profits roughly doubled from the dog days of 1984, yet brokerage executives would just as soon forget the industry's onslaught of bad publicity in 1985.
The public has been blitzed with news coverage of events like E.F. Hutton & Co.'s illegal check-writing scheme and a string of jolting failures in the government securities market.
Bad news aside, Wall Street brass will find ample cause to revel as they gather in ritzy Boca Raton, Fla. this week for the annual meeting of the Securities Industry Association. Among the reasons to toast 1985:
* A boom is corporate mergers and acquisitions boosted fee income throughout the investment banking community.
* Declining interest rates generated substantially higher fixed-income trading revenues.
* The lower interest rates in 1985 sent corporations and municipalities scrambling to raise low-cost funds, propelling the volume of domestic corporate financing over the $100 billion mark for the first time.
* Trading commissions rose about 20% this year, reflecting a jump in trading volume on the New York Stock Exchange to a record average of 105.5 million shares a day (as of the end of October), compared to 91.2 million last year and 85.3 million in 1983.
* Strict cost-cutting measures, taken in response to the poor 1984 showing, have paid off at many firms.
Healthy Profits Seen
As a result, analysts say they expect the industry's pretax profits to land between $3.2 billion and $3.7 billion by the end of the year, shy of the record $3.8 billion generated in 1983 but at least double the sickly $1.6 billion profit recorded last year.
Record or near-record profits are expected at the so-called bulge-bracket investment houses that cater to institutional customers. Earnings at the more retail-oriented brokerage firms are also expected to rebound smartly this year.
And Wall Street professionals will take home much of the profits. "Compensation will be up, too, much more in line with the go-go times of about two years ago," said Peter T. Chingos, national practice director of compensation and personnel at Peat, Marwick, Mitchell & Co.
Senior managers generally will reap the benefits of bonus plan tied to their company's overall performance, he said. Meanwhile, incentives for so-called producers -- such as traders or merger and acquisition specialists -- more likely will be pegged to the performance of their individual sections.
The bottom-line success was attributable largely to disciplined belt-tightening at most brokerage houses. "Cost containment became perhaps the principal focus of chief executive officers at firms of all sizes," SIA president Edward I. O'Brien said in an interview.
Stephen P. Fisher, a brokerage industry analyst at Prudential-Bache Securities Inc., says he expects industry expenses to grow at a rate of about 10% this year, compared with the yearly clip of about 25% that allowed many firms to grow fat between 1979 and 1984.
"Brokerage firms have long been known for their poor expense control, but the sluggish performance of 1984 woke them up to the excesses of the past," Mr. Fisher says. He notes that staff reductions and reduced advertising budgets were central to the cost-cutting programs.
In some respects, 1985 will be a tought act to follow. One reason is that firms cannot lower their expenses much further. Improved performance next year, Mr. Fisher says, must come more from the revenue side, particularly from retail commissions. Fees for retail customers are far higher than the three cents to eight cents a share paid by institutional investors.
Individuals provided the brokerage firms with some unexpected help this year. Bullied out of the stock market by giant institutional players, the small investor couldn't beat 'em so he joined 'em -- in mutual funds, that is. …