financial services industry profitability: moderate level profitability tiburon research september...

Financial Services Industry Profitability:Moderate Level Profitability

Tiburon ResearchSeptember 17, 2014

14.09.17 – Financial Services Industry Profitability © Tiburon Strategic Advisors, LLC™ 2

Evolution of Financial Services Industry Profitability– Market History– Market Definition– Key Valuation Measures– Leading Financial Services Industry Profitability

Market Segmentation– Retail Bank Profitability– Insurance Company Profitability– Brokerage Firm Profitability– Investment Management Firm Profitability

Financial Services Industry Profitability Future Predictions– Decrease in Retail Bank & Insurance Company Profitability– Increase in Brokerage Firm & Investment Management

Profitability

Outline


Financial Services Industry Profitability Have Evolved through Three Phases, Including their Early, Middle, & Recent Phases

Financial Services Industry ProfitabilityHistory

Early Phase

Approximate Dates:1956 - 1982

• --

1999 - 2014

Key Steps:

MiddlePhase

Financial Services Industry

ProfitabilityEmerged

1920 - 1955 2014

Financial Services Industry

ProfitabilityToday

RecentPhase

1983 - 1998

• -- • -- • --

Source: 3/29/11 Advisor Perspectives; 11/25/02 American Banker; 4/15/02 Fortune; 4/12/02 Wall Street Journal; 12/01 Money; 11/15/01 Schwab Conference Call (Lehman); Tiburon Research & Analysis


Source: Tiburon Research & Analysis

Financial Services Firms Strategic Initiatives

Financial Services Firms Strategic Initiatives

CEO focus: better integration & interconnection in critical functions such as risk management, compliance, finance, & technology

--

--


New Product Launch or Investment

Strategy26%

Technology Initiative (e.g., Adding Online

Advice or New Advisor Desktop)

25%

Business Line Restructuring or

Focus on New Channel

13%

Other Strategic Initiative

5%

Expand Core Business

23%

Expand Core Business

4%

Tiburon CEO Summit XXVI Attendees Said that a New Product Launch or Investment Strategy is the Top Strategic Initiative for their Firms in 2014

Tiburon CEO Summit XXVI AttendeesBy Top Strategic Initiative in 2014

Source: 3/10/14 Tiburon CEO Summit XXVI Content Survey Data; Tiburon Research & Analysis


Source: 3/5/14 Tiburon CEO Summit XXVI Content Survey (Curtis); Tiburon Research & Analysis

Several Attendees Noted that they Intend to Use Technology to Enhance their Firm’s Efficiency

Tiburon CEO Summit XXVIContent Survey Feedback

Top Strategic Initiative in 2014

“Efficiency improvements using technology”

– Scott CurtisRaymond James Financial ServicesTiburon CEO Summit XXVI


Source: 3/5/14 Tiburon CEO Summit XXVI Content Survey (Christian); Tiburon Research & Analysis

Several Attendees Noted that they Intend to Improve their Firm’s Client Experience


Top Strategic Initiative in 2014

“Improving the client experience”

– Kent ChristianWells Fargo Advisors Financial NetworkTiburon CEO Summit XXVI


68%

77%

106%

324%

259%

243%

199%

177%

118%

171%

Telecom Services

Utilities

Energy

Consumer Staples

Health Care

Materials

Information Technology

Industrials

Financials

Consumer Discretionary

Consumer Gains were Largest in the Standard & Poor’s 500’s Consumer Discretionary Sector at 324%

Consumer GainsBy Standard & Poor’s 500 Market Sector

Source: 3/8/14 Wall Street Journal (FactSet); Tiburon Research & Analysis

Consumer Gains?

Need S&P logo

Time period?





Profitability

Outline


Financial Services Profitability can be Analyzed Many Ways

Source: 4/12/02 Wall Street Journal; 12/01 Money; 11/15/01 Schwab Conference Call (Lehman); Tiburon Research & Analysis

• --

Comments


Financial Services Industry ProfitabilitySegments

The Financial Services Industry Profitability can Specifically be Analyzed by Individual Segments, Including Retail Banks, Insurance Companies, Brokerage Firms, and Investment Management Firms


Financial Services Industry Profitability

Segments

Retail Banks Brokerage FirmsInvestment

Management FirmsInsurance Companies


Financial Services IndustryMarket Capitalization

($ Trillion)

Financial Services Industry has $2.7 Trillion Market Capitalization, With Retail Banks & Insurance Companies Accounting for $2.4 Trillion

Source: 4/1/11 Yahoo Finance Web Site; 4/1/11 Lightyear Capital Web Site; 4/1/11 Wikipedia Web Site; Tiburon Research & Analysis

$2.7$0.1$0.2

$1.0

$1.4

Retail Banks Insurance Companies Brokerage Firms InvestmentManagement Firms

Financial ServicesIndustry

New York Stock Exchange

market capitalization =

$13.4 trillion

Financial services = ~20%

of S&P 500 market

capitalization

Market capitalization = $13.4 trillion x

20%

Ratio used retail banks (50%),

insurance companies

(40%), brokerage firms

(9%), & asset managers (1%)

Another source said $59 trillion





Profitability

Outline


Financial Services Industry Profitability can be Measured Many Ways

Source: 4/12/02 Wall Street Journal; 12/01 Money; 11/15/01 Schwab Conference Call (Lehman); Tiburon Research & Analysis

• --

Comments


Financial Services Industry Profitability Indicators

The Financial Services Industry Profitability can Specifically be Measured by Revenues & Net Profits


Financial Services Industry Profitability Indicators

Revenues Net Profits


$14.9 $15.0

$12.9 $13.0 $13.1

2006 2007 2008 2009 2010

Financial Services Industry Revenues

($ Trillions)

The Financial Services Industry Generates $13.1 Trillion Revenues, Down 10% Since 2006


$65.7 trillion (total household assets)

x 20%

Copied from Future of Advice

Needs update


$4.5 $4.5

$3.9 $3.9 $3.9

2006 2007 2008 2009 2010

Financial Services Industry Net Profits($ Billions)

The Financial Services Industry Earns $3.9 Trillion, Down 10% Since 2006

Revenues x 30%

$426.5 billion in 4Q/10

Source: 3/18/11 Wall Street Journal (US Department of Commerce); Tiburon Research & Analysis

Copied from Future of Advice

Needs update


Financial Services Industry Net Profits

As a Percentage of Corporate Net Profits

Financial Services Industry Earnings Have Traditionally Averaged About 25%-35% of All Corporate Profits, with 2010 Results Back in Familiar Territory

Source: 4/13/11 Hellman & Friedman Presentation (Thorpe); 3/18/11 Wall Street Journal (US Department of Commerce); Tiburon Research & Analysis

26%27%

22%23% 23%

20%

0%

-10%

20%

25%

30% 30%

28%

25%

28%

32%

1Q/07 2Q/07 3Q/07 4Q/07 1Q/08 2Q/08 3Q/08 1Q/09 2Q/09 3Q/09 4Q/09 1Q/10 2Q/10 3Q/10 4Q/10

4Q/08

Needs update


US Corporate ProfitsShare from the Finance Sector

The Finance Sector Accounted for 26% of US Corporate Profits in 2013

Source: 9/13 Business Week; Tiburon Research & Analysis

25%

5%

31%

25%

18%

27%26%

2007 2008 2009 2010 2011 2012 2013


Down Jones Industrial AverageBy Sector

Financials Make Up 17% of the Dow Jones Industrial Average

Source: 9/11/13 Wall Street Journal; Tiburon Research & Analysis


18%

Health Care13%Consumer

Discretionary12%

Energy11%

Industrials10%

Consumer Staples10%

Utilities3%

Telecom Services

2%Materials

4%

Financials17%



Financial Services Firms Stock Prices, Valuation Levels, & Market Capitalizations

Financial Services Firms Stock Prices,Valuation Levels, & Market Capitalizations

Financial services firms are… 22% of the DJIA

FIG stocks are up Envestnet hit $1.0 billion market

capitalization Huge multiples on Fin Tech firms

ENV over 400!

Rich Repetto (Sandler O’Neil)


60%

75%

105%

320%

255%

240%

199%

177%

120%

175%

Telecoms Services

Utilities

Energy

Consumer Staples

Healthcare

Materials


Industrials

Financials

Consumer Discretionary

The Standard & Poor’s 500 Consumer Discretionary Sector Increased by 320% Since March 2009

Standard & Poor’s 500Performance

By Sector(March 2009 through March 2014)

Source: 3/13/14 Financial Times (Bloomberg) (Thomson Reuters Datastream); Tiburon Research & Analysis





Profitability

Outline


The Leading Financial Services Institutions in Terms of Profitability can be Defined Many Ways


• --

Comments


Financial Services Industry Indicators

The Leading Financial Services Institutions in Terms of Profitability can be Specifically be Defined by…


Financial Services Industry Indicators

-- -- ----


Bank of America & Citigroup Have Large Market Capitalization But Relatively Low Price-to-Book Value Ratios

Market Capitalization Comparison

Source: 3/29/11 Advisor Perspective; Tiburon Research & Analysis

Market Capitalization

Low High

Small

Large

American Express

Price-to-Book Value Ratio

Citigroup

Bank of America

Corporation

Morgan Stanley

UBS

State Street Corporation

Northern Trust

Corporation

Wells Fargo

Corporation

JP Morgan Chase

Raymond James

Financial

Considered deep value





Profitability

Outline


Financial Services Industry Profitability can be Segmented Many Ways


• --

Comments


Financial Services Industry Profitability can Specifically be Segmented to Include Retail Bank Profitability, Insurance Company Profitability, Brokerage Firm Profitability, & Investment Management Firm Profitability


Financial Services Industry ProfitabilityMarket Profitability

Retail Bank Profitability

Brokerage Firm Profitability

Investment Management Firm

Profitability

Insurance Company Profitability

Financial Services Industry ProfitabilityMarket Profitability


Retail Banks Have the Highest Revenues in the Financial Services Industry

Financial Services Industry Revenues

By Segment($ Billions)


Retial Banks InsuranceCompanies

Brokerage Firms InvestmentManagement

Firms

Needs data


Retail Banks Have the Highest Earnings in the Financial Services Industry

Financial Services Industry Earnings

By Segment($ Billions)


Retail Banks InsuranceCompanies

Brokerage Firms InvestmentManagement Firms

Needs data


5.3%

10.7%

6.8%

25.7%



Firms

Investment Management Firms Have the Highest Return on Earnings at 25.7%, with Insurance Companies Next at 10.7%

Financial Services Industry Return on Earnings

By Segment

Source: 4/6/11 Yahoo Finance Web Site; Tiburon Research & Analysis

Average

Return on equity


7.7% 7.6%

8.6% 8.3%



Firms

Brokerage Firms & Investment Management Firms Have the Largest Net Profit Margins at 8.6% & 8.3% Respectively

Financial Services Industry Net Profit Margin

By Segment

Source: 4/6/11 Yahoo Finance Web Site; Tiburon Research & Analysis

Average





Profitability

Outline


• --

Comments

Retail Banks are Profitably



Retail Bank Profitability Key Issues

Retail Bank Profitability Have a Number of Key Issues, Including Macro Economic Pressure and Segment Competition


Retail Bank Profitability Key Issues

Marco Economic Pressures

Segment Competition


Retail Bank Stocks are Sensitive to Macro Economic Pressures

Source: 9/1/03 New York Times; 3/2/03 Fortune; Tiburon Research & Analysis

• --

Comments

Bank stocks fell 12% in 2002 compared to 23% for the

overall market


Retail Bank Stocks Have Been Steady for a Number of Reasons, Including Falling Interest Rates, Surging Deposit Growth, & Booming Mortgage Loan Markets

Source: 9/1/03 New York Times; 3/2/03 Fortune; Tiburon Research & Analysis

Falling Interest Rates Surging Deposit GrowthBooming Mortgage Loan

Markets

Retail Banks ValuationsReasons for Steadiness

• -- • -- • --





Profitability

Outline


• --

Comments

Insurance Companies are Profitable



Insurance Company Profitability Have a Number of Key Issues


Insurance Company Profitability Key Issues

Insurance Company Profitability Key Issues

-- --





Profitability

Outline


• --

Comments

Brokerage Firms are Profitable



Brokerage Firm Profitability Has a Number of Key Issues


Brokerage Firm Profitability Key Issues

Brokerage Firm Profitability Key Issues

-- --





Profitability

Outline


• --

Comments

Investment Management Firms are Profitable



Investment Management Firms Profitability Has a Number of Key Issues


Investment Management Firm Profitability Key Issues

Investment Management Firm Profitability

Key Issues

-- --





Profitability

Outline


Financial Services Industry ProfitabilityFuture Predictions

Financial Services Industry Profitability Future Predictions Include Decrease in Retail Bank & Insurance Company Profitability & Increase in Brokerage Firm & Investment Management Profitability


Financial Services Industry Profitability

Future Predictions

Decrease in Retail Bank & Insurance Company

Profitability

Increase in Brokerage Firm & Investment Management

Profitability


30%

25%

23%

22%

21%

20%

18%

14%

6%

Goldman Sachs Group

Deutsche Bank

Barclays

Credit Suisse Group

Jefferies Group

Citigroup

JP Morgan Chase & Company

Morgan Stanley

UBS

The Fixed Income, Currencies, & Commodities Business Represents Up to One-Third of the Net Profits of Some Investment Banks, Including Goldman Sachs Group

Investment BanksNet Profits

Share from Fixed Income, Currencies, & Commodities Businesses

Source: 9/24/13 Financial Times; Tiburon Research & Analysis

Tiburon CEO Summit XXV

Page


Almost All Investment Banks are Realizing Lower Revenues from their Fixed Income, Currencies, & Commodities Businesses, Including at Citigroup and Morgan Stanley, which Each Posted a 21% Decline

Investment BanksFixed Income, Currencies, & Commodities Businesses

Quarterly Revenue Change

Source: 9/25/13 Wall Street Journal; Tiburon Research & Analysis

-21%

-21%

-9%

-2%

Citigroup

Morgan Stanley

Bank of America Corporation

JP Morgan Chase & Company


Page


6%

11%

2008 2012

Financial Services Firm RevenuesShare from Wealth Management

Wealth Management Fees Represent a Larger Portion of Revenue in 2012 at 11%, Almost Double that of 2008

Source: 10/1/13 CNN Money.Com Web Site; Tiburon Research & Analysis


Page

Asset and/or wealth

management?


70%

50%

27%

50%

3% 0%

2006 2012

Wealth & Asset Management

Investment Banking & Trading

Morgan StanleyRevenues

By Business

Morgan Stanley’s Revenue Sources Shifted After the Financial Crisis with a Reduction in Investment Banking & Trading from 70% to 50% of its Revenues, While Wealth & Asset Management Filled the Gap

Source: 2/25/14 Morgan Stanley 10Q Report; 9/10/13 Wall Street Journal; Tiburon Research & Analysis

Other Businesses

2013 data?: 41%, 41%, &

12%?


Source: 10/1/13 CNN Money.Com Web Site; 9/25/13 Wall Street Journal; 9/24/13 Financial Times; 9/10/13 Wall Street Journal; Tiburon Research & Analysis

Role of Wealth & Asset Management


The history Asset & wealth

management account for relatively small shares of revenues and net profits of most large financial services firms

The news FICC down Asset & wealth

management up


Page

Move up to chapter one?

Fee-based products, especially

wealth management,

remain a focus for the

big banks


Tiburon CEO Summit XXVI Attendees Said that the Importance of Asset & Wealth Management to Financial Services Firms will Increase Over the Next Five Years

Up83%

Steady14%

Down3%

Tiburon CEO Summit XXVI AttendeesBy Importance of Asset & Wealth Management to Financial

Services Firms Over Next Five Years



Tiburon CEO Summit XXVI Attendees Said that Big Banks Will Not Divest Asset & Wealth Management Businesses in the Next Downturn

Tiburon CEO Summit XXVI AttendeesBy View Retail Banks’ Strategy in Next Market Downturn

No79%

Yes21%



Source: 3/30/14 Tiburon CEO Summit XXVI Content Survey (Wietz); Tiburon Research & Analysis

Several Tiburon CEO Summit XXVI Attendees Commented that Banks will Divest Non-Core Businesses in the Next Downturn


View Retail Banks’ Strategy in Next Market Downturn

“Yes, banks will divest asset & wealth management businesses in the next downturn. Those are considered non-core and thus will be

the first to go”– Craig Wietz

First Rate Investment SystemsTiburon CEO Summit XXVI





Profitability

Outline


• --

Comments

Retail Bank Profitability is Likely to Decline






Profitability

Outline


• --

Comments

Brokerage & Investment Management Firm Profitability is Likely to Increase



14%

16%

17%

19%

30%

Regional Banks

Credit Card Firms

All Stress TestBanks

Money CenterBanks

Trust Banks

Trust Banks Share Buybacks are Expected to be 30% through March 2015

Expected Share BuybacksBy Bank Type

(Through March 2015)

Source: 3/17/14 Wall Street Journal (Goldman Sachs Group); Tiburon Research & Analysis


2.4%

2.6%

3.2%

5.0%

5.0%

Money CenterBanks

Regional Banks

All Stress TestBanks

Credit Card Firms

Trust Banks

Trust Banks & Credit Card Firms Earnings per Share are Expected to be 5% through March 2015

Earnings per ShareBy Bank Type

(Through March 2015)

Source: 3/17/14 Wall Street Journal (Goldman Sachs Group); Tiburon Research & Analysis


Source: 9/24/13 Commonwealth Financial Network Email (Rooney); 9/24/13 Tiburon CEO Summit XXV Content Survey Data; 9/14/13 The Economist; 9/13 Business Week; Tiburon Research & Analysis

FIG Profitability

FIG Profitability

8.3% ROE Up moderately

Depends on interest rates 26% of corporate profits


Tiburon CEO Summit XXV Attendees Anticipate that Financial Services Firms Profitability Will Increase Over the Next Five Years

Source: 9/24/13 Tiburon CEO Summit XXV Content Survey Data; Tiburon Research & Analysis

Financial Services Firms Profitability Over Next Five YearsBy Tiburon CEO Summit XXV Attendee Vote

Up Hugely9%

Up Moderately77%

Stagnant14%

Down0%


Source: 9/24/13 Commonwealth Financial Network Email (Rooney); Tiburon Research & Analysis

Some Attendees Believe that Financial Services Firms Profitability Over the Next Five Years is Dependent on Short-Term Interest Rates

Financial Services Firms Profitability Over Next Five Years

“90% depends on if or when short-term rates go up”

– John Rooney Commonwealth Financial NetworkTiburon CEO Summit XXV


Source: 10/1/13 CNN Money.Com Web Site; 9/25/13 Wall Street Journal; 9/24/13 Financial Times; 9/10/13 Wall Street Journal; Tiburon Research & Analysis



The history Asset & wealth

management account for relatively small shares of revenues and net profits of most large financial services firms

The news FICC down Asset & wealth

management up


6%

11%

2008 2012

Financial Services Firm RevenuesShare from Wealth Management

Asset Management Fees Represent a Larger Portion of Revenue in 2012 at 11%, Almost Double that of 2008

Source: 10/1/13 CNN Money.Com Web Site; Tiburon Research & Analysis



Tiburon Strategic Advisors

• Focus on corporate-level strategy- Serve senior executives only at financial

services companies- Key services: market seminars, market

research, & strategy consulting - Served over 400 corporate clients and

completed over 1,700 projects since 1998- Host semi-annual CEO Summits, offer free

weekly research releases, and offer free business benchmarking tools for all types of advisors

• Chip Roame background- McKinsey & Company- Charles Schwab & Company- Tiburon since 1998

Comments

financial services industry profitability: moderate level profitability tiburon research september...

Documents

content survey feedback

consumer gains

risk management

investment strategy

standard poors

efficiency improvements

key steps

schwab conference