US banks invade broker business but 'bull' sees no red flag, so far
For a long time, bankers have complained about what they considered to be a Merrill Lynch infringement of their territory. So in the last nine months, the banking industry has decided to grab the ''bull'' by the horns.
Three of the nation's larger banks - Bank of America, Chemical Bank, and Security Pacific - have either announced plans to enter, or have entered, the discount-brokerage business. They would not actually be selling stocks; they would be working through established discount brokers like the Fidelity Group or Charles Schwab & Co. More banks are expected to announce similar plans soon.
The bull, however, says it's not worried.
Wallace O. Sellers, vice-president at Merrill Lynch, Pierce, Fenner & Smith Inc., says he is more worried about the aggressive brokerage houses of Shearson/American Express and Dean Witter Reynolds than he is about a bunch of bankers. He says he figures the bankers' entrance into the discount-brokerage business will mainly provide competition to other discount brokers - not full-service brokerage houses. ''All of these new entries,'' he said in an interview, ''will become highly competitive and not very profitable.''
To prove his point, that discounters have not hurt firms like Merrill Lynch, Mr. Sellers says full-service brokerage houses have increased their market share since the advent of the discount-brokerage business. However, he does admit that without the discounters, the growth at the full-service brokerages would have been stronger. The discounters' main victims, he says, have been the regional, or smaller, firms. Since discounting began in 1970 at Source Securities, the discounters' market share has grown to 7 or 8 percent of all stock traded. Since 1970, Merrill Lynch's market share has grown from 9.1 percent to 13.5 percent last quarter.
Merrill Lynch officials are so confident in the company position that they say they aren't planning any special advertising or marketing campaign to counter the entrance of banks into the brokerage business. In fact, a spokesman says, company spending on advertising is down this summer.
The big broker's complacency may, however, be shaken, some industry observers say. Perrin Long with Lipper Analytical Services says the banks will be a threat to the full-service brokers over the long term.
''Normally, if you look at any service or product that a bank supplies,'' he says, ''you will see that over a period of time, it becomes the dominant provider.'' As more money-center banks and regional banks get into offering discount services, Mr. Long says, ''it will put pressure on the multi-line firms about raising commission rates in the future, and may even cause them to reduce them to keep their retail customers.''
Certainly, the banks are designing their services for certain customers of the big brokers. Chemical Bank, which announced this week that it will offer a discount-brokerage service and other financial services, said it will focus on ''high-income individuals and customers who trade securities frequently.''
Robert H. Smith, a Security Pacific Bank executive vice-president in Los Angeles, says full-service firms will probably lose the most customers. In the six months the bank has offered its service, using Fidelity-Source to do the actual transactions, it has picked up 5,350 customers. Currently, it is accomplishing 75 trades a day, and getting closer to its break-even point of 120 trades a day. All of the accounts so far have been opened by people who previously dealt with brokers. The bank is still processing 8,000 inquiries that have come in from its advertising.
Security Pacific is also debating whether or not to actually become a broker itself. Bank of America has already applied to the Federal Reserve Board to buy Charles Schwab. Mr. Smith says the Security Pacific decision will be based on cost.
Banks are also beginning to offer the equivalent of Merrill Lynch's very successful cash management account. The CMA permits a customer to place excess cash reserves in a money-market fund, then use a credit card to draw against it. Citibank and Chase Manhattan are beginning to offer such services, and Chemical Bank says it is exploring whether or not to begin such an account. Security Pacific does not offer a CMA-type account, but officials say it separately offers almost-equivalent services.
The nuclear reactor on Three Mile Island is still cooling down, but investor interest in General Public Utilities, the owner of the disabled reactor, is heating up somewhat. Fulton S. Holmes, an analyst at Morgan Stanley & Co., in a research report, recommends the stock for speculative accounts.
Mr. Holmes reasons that the current $5.50-a-share stock price will rise closer to $7 a share, a level it reached last year, as the market discounts the return to operation of the plant's Unit 1, which has been sidelined with steam-generator problems. Once Unit 1 is operating again, GPU should see an improvement in its financial and operating results.
Needless to say there are some real risks in investing in General Public Utilities. For example, there is the possiblity that a consortium of banks will not renew a $200 million revolving line of credit when it falls due in December. And the Nuclear Regulatory Commission may decide for political reasons not to allow the start-up of Unit 1. Once it does start up, however, the troubled utility should start to report some earnings improvements. And there is a good chance the banks will renew the loan since the utility has made all interest payments on it.
Unit 2 also made the news last week, when technicians inserted a camera into the reactor core to examine the damage. It's been three years since the reactor broke down.
Investors tried to keep the summer rally going last week, but ran into some profit taking and were only somewhat successful.
The Dow Jones industrial average, after tacking on 14 points the previous week, added 1.90 points last week, closing at 830.57. Analysts said stocks were not stronger because of the profit taking. Most major banks lowered their prime interest rate to 16 percent, and investors were hoping for further reductions this week.