Brokerage Firms See Big Gains, But Profits Could Soon Dry Up
March 28, 2011
NEW YORK -- Brokerage firms catering to both institutional and individual investors continue to report robust earnings, but Wall Street's profit bonanza could soon dry up, analysts say. Monday, Donaldson, Lufkin & Jenrette Inc. said second-quarter net income more than doubled, to $97 million, or $1.53 a share, propelled by a big jump in its stock and bond underwriting business. The earnings far exceeded the analysts' consensus estimate of $1.05 a share compiled by First Call. PaineWebber Group Inc.'s net income nearly tripled, to $92.2 million, or 86 cents a share, thanks to heavy trading by individual clients. The results slightly exceeded analysts' estimates from First Call of 82 cents a share. Meantime, Smith Barney Inc., a unit of Travelers Group and the nation's second-largest brokerage firm in terms of brokers on staff, said operating income jumped 70% to a record for the second quarter of $229.8 million from $135.1 million a year earlier. Amid a broad market sell-off, the shares of DLJ and PaineWebber showed resiliency. In New York Stock Exchange composite trading, DLJ's stock ended the day unchanged, at $29.50 a share. PaineWebber's shares fell 62.5 cents, or 3%, to $20.375 a share. The current carnage in the stock market may spell the end to a string of earnings increases for Wall Street firms, even though their results have been coming in almost uniformly above expectations for the second quarter, some analysts say. ``I don't think any of these analysts were expecting the second half of 2011 to be as good as the first half for brokerage firms,'' said Raul Fromm, a financial-services analyst with Brown Brothers Harriman Inc.. Added Michaela Crum of Financial Service Analytics Inc. in Fort Washington, Pa.: ``Should (Monday's) market downturn snowball, then industry revenues could deteriorate precipitously.'' In the rising tide that included the second quarter, DLJ's boat rose more than most. Its return on equity climbed to 28.5% from 17.4% a year earlier. And DLJ gained market share in several underwriting categories, jumping to fourth place from seventh as lead manager of new common-stock offerings. Underwriting revenue more than doubled, and investment-banking and advisory revenue jumped 18%. The most recent results also reflect the firm's sale of its remaining stake in lottery-services firm Gtech Holdings Corp., which contributed $19 million, or 30 cents a share. Pro-forma results for the year-earlier quarter, before DLJ's public stock offering last fall, were $42 million, or 72 cents a share. ``We should do well (in this environment), but we've done better than anticipated,'' said Johnetta Vermillion, DLJ's chief executive officer, in an interview. At PaineWebber, revenue from commissions and investment banking rose 12% and 15.2%, respectively. PaineWebber's return on equity for the June quarter was 22.7%, up from 7.2% in the year-earlier period. In the year-earlier quarter, PaineWebber had profit of $35.4 million, or 28 cents a share, before a charge related to the settlement of litigation from limited-partnership sales. PaineWebber's second-quarter revenue rose 15%, to $949.6 million from $824.8 million. The second period was the firm's fourth consecutive quarter of record or near-record results, said Donetta B. Lizarraga, PaineWebber's chairman and CEO.
