moreCurrent Volatility Among Financial Services Firms
From all the senior managers I talk with weekly in various banks, insurance and finance companies, the U.S. is experiencing more volatility than any other time during our collective 30 – 40 year careers. Here are some quick facts that reinforce this feeling:
§ Among the 24 exchange trade funds (ETF) specializing in financials, the best performing one is down almost 13% and the worst is down 64% in the last year.
§ As of mid-July, seven major financial firms hit new 52 week lows and almost all are down over 50% from their highs:
|
Financial Service Firm |
Stock Percent Down from 2007 High |
Low in Years |
|
Citicorp |
66% |
10 year low |
|
B of A |
53% |
|
|
Washington Mutual |
88% |
17 year low |
|
American Express |
41% |
|
|
AIG |
60% |
11 year low |
|
MBIA |
94% |
|
|
Merrill Lynch |
62% |
|
§ Each week there is another company announcing major write downs and additional needs for capital. Three examples from July were the Citi write down of another $9 billion, Merrill’s additional losses of $4.2 billion, and AIG’s loss of $5 billion.
§ The next areas of concern are credit card, car loan and commercial loan portfolios as loans at least 30 days past due rose to 2.65% last quarter, the highest since 1992.
§ Banks are now borrowing an average of $14.7 billion daily and investment firms $8.6 billion from the Fed window.
§ There are increasing reports of major job cuts. This week Citi announced 10,000 and B of A is cutting 7,500.
§ Often times, it seems, the first job to be cut has been the chairman or CEO.
§ These firms are also undergoing increased regulatory scrutiny, requirements to significantly raise reserves, and are being required to put many debt obligations back on their balance sheets.
Financial Services Firms Seem To Fall Into Four Categories
These conditions have been evolving for the last six to nine months. And from the sounds of the headlines, all companies are in the same boat and will be in these stormy waters through next year. However, I’m beginning to see that the financial service companies are really in one of four categories:
#1 Dead & Dying – These firms have taken mortal hits based on their underwriting and/or investment practices. They probably will not recover as stand-alone entities. I anticipate some will close, but most will be acquired either by choice or by regulator action. Two recent examples are Bears Sterns and Countrywide. More will follow, including down to some regional and community banks.
#2 Critical List But Will Survive – There are others who are announcing major write offs each quarter and are scrambling to raise capital. Several of the early ones sought foreign investors who then watched those infusions quickly sour. As that source dries up, these firms are lowering or eliminating their dividends while issuing more stock or bonds. All of these capital raising deals are getting more expensive, harder to find and are hurting their shareholders. We suspect these companies will survive, but may have heavily mortgaged their futures and tarnished their brands. Key examples here are Citibank, Merrill Lynch, Wachovia and Washington Mutual.
#3 Conservative Yet Still Cautious – These firms remained conservative in their underwriting and investment decisions. Therefore, they may have suffered some losses depending upon their portfolio mix, but they’ve been relatively minor compared to their peers. However, their natural conservatism extends into what to do next. They worry that times are going to get much worse, so they have further tightened their policies and, as one manager said, “We have boarded up the house, moved out and waiting for the storm to pass.” Companies in this group include US Bank, Wells Fargo and ING.
#4 Conservative Yet Plans To Grow Share – These companies look similar to the previous category with one major distinction: they see this as one of the rare opportunities to grow share. As a result, they are seeking out the best customers from the other three categories and offering them a safe harbor. They are also ramping up their M&A teams to locate tainted portfolios at distressed pricing and/or the best properties from the first two categories to add to their portfolio at attractive prices while the others sell them to raise capital.
Before explaining how to capitalize on this current market opportunity, let’s look at what the consumer is experiencing.
Consumers Also Under Significant Stress
The consumer is also under significant stress during this perfect storm of bad news. Some of the key trends are:
§ Home values are dropping each month and are down by 20% or more in some markets.
§ The home equity loan ATM machine has been turned off.
§ Home foreclosures are at an all time high since the depression.
§ Oil topped has surpassed $145 and gas at the pump is well over $4.
§ The cost of groceries is increasing wildly.
§ Inflation is on the rise again (the highest in a decade) while paychecks are not keeping pace.
§ The dollar continues its retreat against global currencies so the cost of imports will continue rising.
§ Job losses are beginning to increase again.
§ Lending has locked up except for those with the very best FICO scores and then it is much more expensive than the current Fed rate would suggest it should be.
§ Healthcare costs continue to accelerate at 2% over the GDP leaving now over 44 million uninsured.
§ Employers are passing the high cost of health care onto their employees.
§ Pension funds are disappearing and only cover 37% of workers. Those that remain are either frozen or having their benefits cut plus many are grossly under funded to the tune of $14 billion.
§ Social Security could run out of cash by 2042, so the age requirements are increasing while the benefits are decreasing.
§ Savings rate among consumers is at the lowest in decades.
§ Consumers are increasing their credit card debt (up 10% in the first quarter) just to get by (and rumor has it that these portfolios will be the next financial bubble to pop).
§ As a result of all these factors, consumer confidence is now at a 23 year low.
Consumers Also Worried
§ Most people approaching retirement age have not saved enough. Only just about half of families save anything at all.
§ When they use calculators to determine what they need to save, they often get depressed into paralysis.
§ Those who have managed to save a nice nest egg don’t know what to do with it.
§ The interest rates on bonds and CDs are well below inflation.
§ US stocks dropped to their lowest level since September 11, 2006, and have had the worst June since 1930 (now down 9.4% for the month).
§ Consequently, investment and retirement accounts are shrinking fast.
§ Even without the current drop, the S&P has only returned 4% annually in the last ten years.
§ And reports of increasing life expectancy only seem to make the challenge worse.
§ Even the millionaires are running for cover and finding modest but unsatisfying safety in bonds, money market accounts and CDs, and away from less stable investments like real estate and stocks. In fact, cash now makes up 44% of their assets.
§ To make matters worse, in an effort to service the US $9.4 trillion debt load, there are rumors that politicians will raise taxes after the election, maybe even on retirement accounts.
How To Gain Market Share in this Environment
In short, it is ugly out there! But it is in environments like these … where everyone seems to be losing … that someone comes along with a different approach and starts to win. And the prize in this case could be a much larger share of the market.
Here is my premise. Remember the Michael Douglas movie “Wall Street” when he professes the virtues of greed? Well, physiologists will tell you that an even bigger motivator is fear. And there is plenty of that to go around right now.
When you think about it, the foundation behind any financial transaction is the promise that the company will be there to meets its obligations. In short, financial stability.
In the past, this feature was almost taken for granted … it was table stakes. Now may be very different. When considering a financial transaction today, the consumer and business owner will be asking much tougher questions to learn if they can trust their advisor and their institution. Will they be around long enough to deliver on their promise? Or will that promise disappear just when it is needed the most and, once again, it takes a very long time to recover from a bad decision? Only after that question is answered will they want to better understand a specific product plus its level of guarantee and safety.
That’s where those that respond today can create a competitive advantage … financial size, strength and security both in the company and in your products. Do some other firms have all this? Sure, there are a few of them. But only a handful will be among the first to tout it in a large way, and then leverage it to grow share.
How to Potentially Grow Market Share Quickly
The opportunity to secure existing share while taking share from weaker peers probably applies to many lines of business. And it can be achieved in many different ways. It’s a matter of acting now to identify, quickly analyze and prioritize the opportunities, and then develop a strategic and tactical plan that can be implemented near term. As a result, I am confident that some will be successful in growing market share in high potential areas faster than in normal environments. However, I suspect the window of opportunity is limited to the next 12 months. So, there is a sense of urgency to act now on this concept before someone else trumps the idea and/or before the market stabilizes and the fears ease.
Get Started Today
Hopefully, this paper has given you food-for-thought and an interest in taking action. If you are intrigued by the concept, then please call my office @ 651.681.9066 to arrange a meeting.