Bear Stearns is the investment-banking model to strive for. That, at least, is the opinion of David Hendler, banks and brokerage analyst at CreditSights: “Bear Stearns may be the new business model for success in the changed brokerage playing field.”
The US investment bank is a big player in all the customer businesses which matter. It’s a big underwriter of asset-backed securities, strong in credit and interest-rate instruments, and was the number one bank for the quarter in municipal-bond underwriting, helped in large part by underwriting $4.7 billion in tobacco-fund asset-backed deals for the states of New Jersey and California. It’s doing a good job selling equity derivatives and trading convertibles, and even has done well in M&A, announcing a surge in completed M&A revenues.
But its core franchise driver is probably mortgage-backed securities, in which Bear is second only to UBS Warburg in the US. It’s had another good quarter, driven by high volumes of mortgage refinancings, but also by a large appetite for the product from the banking industry. “There is an incredible bid for MBS product from the banking sector as it is one of the only ways banks can take advantage of the steep yield curve environment,” says Hendler.
Its bigger and more high-profile competitors are still reeling from the collapse of the TMT boom. Morgan Stanley, for example, revealed on its first-quarter earnings conference call last month that this January was the first in almost 30 years in which it didn’t price an IPO.
It’s a similar story elsewhere: staff are still being fired, lawsuits still being battled, and proprietary trading is still the only revenue stream which offers much solace. Most recently it’s foreign exchange and commodities trading which have been the sweet spots, judging by the increase in value at risk. “The biggest Goldman drivers in the first quarter were currency VaR which skyrocketed 72% and commodities, which increased 38%,” says Hendler.
Volatility in the dollar-euro price was the hotspot for foreign exchange trading, while a cold US winter and the lead-up to the war against Iraq had a big impact on energy prices. Morgan Stanley is particularly well placed to take advantage of the energy price spike because it is a shipper on the Colonial Pipeline, which means it can buy and deliver the physical commodity, as well as trade it. “Morgan can deliver physical against financial contracts, which we believe allowed the company to take advantage of arbitrage opportunities that were huge in the last quarter,” says Hendler.
Despite all these one-off trading and prop trading gains, most brokers are reporting nowhere near the results they were back in the 1990s. Apart from Bear Stearns, which recorded a pre-tax return of 28.1% for the first quarter. That’s what its competitors were making in the boom years, yet, says Hendler, “these margins are much more impressive in a much weaker overall securities market climate where the hegemony of traditional investment banking and equities is in question.”
