On-Line Discount Brokers Had a Tough Quarter
Snel, Ross, American Banker
Despite favorable publicity, several of the leading discount firms in on-line brokerage are still having growing pains, financial results for the latest quarter suggest.
Two prominent companies -- E-Trade Group and DLJdirect Inc. -- reported losses, while National Discount Brokers Group earned $435,000 after losing $650,000 a year earlier. All failed to measure up to the discount brokerage leader, Charles Schwab & Co., whose net income rose 27%, to $125 million.
Meanwhile, two of the banking companies that do all or much of their business on the World Wide Web -- Net.Bank Inc. of Atlanta and Telebanc Financial Corp. of Arlington, Va. -- registered profits of $1.1 million and $2.1 million, respectively.
The mixed bag of results from on-line brokers is expected to continue this week, with a 5-cent-a-share loss from Ameritrade Holding Corp. and next month with a 6-cent-a-share profit from TD Waterhouse Group, according to the consensus estimate from First Call Corp., like American Banker a Thomson Financial company.
Industry experts said a general slowdown in trading because of the summer doldrums and a decline in Internet stocks that are the darlings of on-line investors -- contributed to the sluggish quarters. Some firms, however, were able to offset declining volumes by attracting new customers and more assets.
In early August, Credit Suisse First Boston Corp. analyst Bill Burnham -- now general partner at Softbank Capital Partners -- said it was "probable" that the third quarter would see, for the first time, a decline in trading volume on a sequential-quarter basis.
He based that forecast on a measurable drop in volume between April and July, the first months of the second and third quarters.
"The game has definitely changed for on-line financial services players, said Fiona S. Swerdlow, senior analyst at Jupiter Communications. "Firms that want to increase revenue from individual investors must look beyond transaction fees and become the primary keepers of client assets."
Recent research has led Jupiter to conclude that firms that focus on gathering assets rather than transaction fees "will dominate the space."
The on-line firms had prepared analysts and investors for the effects of lower trading volume.
"Overall, there was not a lot of surprise -- just some reassurance that it wasn't worse than had been predicted," said Richard H. Repetto, research analyst at Lehman Brothers Inc. in New York.
Signs of future growth were evident, though.
San Francisco-based Schwab, for example, saw trading volume decline, but it brought in $25 billion of net new assets during the quarter, an increase of 31% from the year-earlier period.
"Schwab is going after customers who have significant assets," said Greg Smith, a research analyst at Hambrecht & Quist in San Francisco.
These "high-quality accounts" are bringing in an average of $44,000 in net new assets each, an increase of 42% from a year earlier, said chairman and co-chief executive officer Charles R. Schwab.
The company earned $125 million in the quarter that ended Sept. 30, down from $151 million in the previous quarter but up from $98 million in the 1998 third quarter.
Trading volume at E-Trade remained virtually unchanged from the second to the third quarter of calendar 1999. …