Bank On An Even Tougher 2003
-- January 21, 2003
Investment banking and brokerage firms had a tough year in 2002. Just take a look at the latest earnings reports from Citigroup and Charles Schwab. Citigroup's profit plunged 37% as its investment and corporate banking division posted a $344 million loss for the fourth quarter 2002. Charles Schwab's net loss widened to $79 million in the fourth quarter -- increasing six-fold from a year earlier. But if these companies think that business will recover swiftly in 2003, they must also think that the past three-year period has been a mere "correction" and not the bear market it truly is.
Here's why: The declining stock market and weak economy are going to continue to hammer earnings at financial firms. We're already seeing signs of the recent "recovery" rally breaking down. Stocks fell for the fifth straight trading day. And though there may be other rallies from time to time, we expect the market to end the year lower just as it has for the past three years. And in a prolonged bear market, investors tend to cut back on the volume of trades through their brokers, not increase it.
And investment banks will be especially hit hard as this bear market continues. For instance, business investment is NOT picking up. On the contrary, just yesterday we told you about the myriad companies that are slashing spending. That means less borrowing from and less business for investment banks. And when was the last time you heard about a big IPO? Investment banks rely on IPOs to bring in volumes of business. Without them, they can't rake in the cash.Finally, Citigroup and the other investment companies caught defrauding investors will face ongoing costs for independent research -- costs that the investment companies have already complained will hurt their bottom line.
These are just a few of the roadblocks to profits that investment banks and brokerage firms will need to overcome in 2003.
related article: Citigroup Profit Falls 37 Percent