Companies like Merrill Lynch and Citi are turning their focus to sometimes less-profitable but steadier businesses, the Wall Street Journal reports.
After announcing nearly $15 billion in fourth-quarter write-downs yesterday, Merrill CEO John Thain emphasized the importance of the firm’s bread-and-butter business of selling stocks and bonds to investors, which has taken a back seat in recent years as the firm pushed into riskier areas.
“I think Merrill Lynch is known for its client focus and its wealth-management businesses,” Thain told the WSJ. “We are still going to have a trading component to our business, but it is not going to be of the same nature.”
Merrill’s stock dropped $5.64, or 10%, to $49.45 on the New York Stock Exchange, leading a marketwide decline. Merrill’s exposure to the subprime market and bad bets in the mortgage sector led to its decline.
By recognizing that its hedges with one insurer may be worthless, Merrill confirmed the validity of investors’ past worries about its remaining exposures to several others, analyst David Trone of Fox-Pitt Kelton told the WSJ. “While investors have for some time worried about new areas of exposure, Merrill’s impairment actions in these areas officially marks the transition from possibility to realization,” Trone says.
Big banks such as Citigroup are holding on to more of the loans they make, rather than sell them to investors, the paper says. That requires that they set aside more capital on their balance sheet, a move that drags on future earnings growth.
Financial firms “are going to have to slow things down,” says David Hendler, senior analyst at CreditSights to the WSJ. “They’re going to see less transaction volume and less complexity; there will be more of a focus on generic product lines.” The result: Banks and brokers, whose returns in recent years have regularly topped 20% and at times 30%, are more likely to see this measure of profitability fall to the “mid-to-high teens in good years and high single digits in the bad years,” Hendler says.