After more than a half-century of sharing little more than the "bank" label, commercial and investment banks have spent the last few years competing for the same corporate customers.
Pretty soon, some analysts say, they may find themselves competing for shareholders.
Commercial banks have been viewed by investors primarily as lending institutions with fairly stable earnings growth whose stock valuations ebbed and flowed tolerably with the cycles of the economy.
The more mercurial fortunes of investment banks, on the other hand, were seen as closely tied to interest-rate movements and to the performance of the stock and bond markets.
But these once-obvious distinctions are blurring, as commercial banks have developed securities underwriting and trading businesses and investment bankers have begun lending and money management operations.
The convergence of business lines could have significant, and perhaps negative, ramifications for commercial bank stocks.
"Some commercial banks that have businesses very similar to those of Morgan Stanley and Merrill Lynch will probably trade more like them," said Guy Moszkowski, an investment banking analyst at Sanford C. Bernstein & Co.
To trace this evolution, American Banker is enlarging its stock coverage to include more of commercial banks' competitors, including the stocks of investment banks. (See article below)
In significant ways, the identities of the two kinds of banks - separate since the Great Depression - have already shifted.
Last year, five of the top 15 investment-grade underwriters, with 15% of the market, were commercial banks, Mr. Moszkowski said. They were J.P. Morgan & Co., Chase Manhattan Corp., Union Bank of Switzerland, First Tennessee National Corp., and NationsBank Corp.
Some doubt that commercial banks will make further major inroads as underwriters. But to whatever extent commercial and investment banks become alike, the more important factor may be how kindred they are in the eyes of investors.
"The investment banks have historically traded at around five to seven times (expected) earnings, while the commercial banks have traded at eight to 10 or 11 times earnings," said Katrina Blecher, an analyst at Gruntal & Co.
Ms. Blecher said the best way to predict investment banks' revenues is to look at their pipelines for dealmaking. She also likes companies that shun aggressive trading.
Other take a broader view. "We look at different trends in the equity, bond, and commodity markets in conjunction with the emerging markets arena, and then apply some human touch and make a judgment," said Dean Eberling of Prudential Securities.
"From quarter to quarter, because there is more volatility to the earnings stream because of the sales and trading component, the margin for error is typically a little bit wider," said Susan L. Roth, a commercial and investment bank analyst at Bear, Stearns & Co.
Indeed, the challenge is particularly great for investment banks that have large proprietary trading operations, such as Salomon Brothers.
"If we have a decent quarter, where underwriting picks up and fixed- income trading picks up, we can get a good idea of earnings in just talking with the company," said Steve Eisman, an analyst at Oppenheimer & Co.
"With Salomon, the problem is that while investment banks will have the same trend, the proprietary trading operation could totally destroy or increase or have no impact on earnings. There's no rhyme or reason with regard to the rest of the business," Mr. Eisman said.
As a result, the average difference, or standard deviation, of earnings estimates expressed as a percent of the average estimate on Salomon is 11.2%, a much higher percentage of the total earnings estimates than for most other commercial and investment banks.
One bank analyst pointed to Salomon's results as the most extreme example of volatile investment banking earnings.
In the first quarter of 1994, Salomon earned 48 cents a share and then lost money for the rest of the year. In the second quarter, the company lost $2.08 per share, followed by deficits of $1.13 in the third, and $1.65 in the fourth.
Salomon showed significant improvement last year, generating attractive earnings in all but the second quarter, when it lost 73 cents a share. It had gains of 59 cents a share in the first quarter, $2.10 in the third quarter, and $1.33 in the fourth.
Some analysts say price-to-earnings is a difficult yardstick to apply to investment banks because of their volatile earnings.
"Through the nature of the stock market and interest rates, it's hard to know the price-to-earnings ratio," said George Salem, a bank analyst at Gerard Klauer Mattison. "What does a price-to-earnings multiple mean for investment banks? It's sort of like the airlines."
Instead of price-to-earnings measurements, price-to-book ratios are sometimes used.
The range of these ratios for investment banks is one to two times their book value per share. It is unlikely an investment bank would generate a higher ratio, said Mr. Eisman of Oppenheimer.
Merrill Lynch currently has the highest such ratio at 1.84, Morgan Stanley is next, at 1.78, followed by Bear, Stearns & Co., 1.44, Salomon, 1.07, and Lehman Brothers, 0.97.
By comparison, Citicorp is trading at about 1.9 times its book value.
After a year of robust earnings in 1995, fueled by the big advances in the financial markets, few analysts see any screaming buys among investment banks.
"At this point, all the lines of revenue are so strong, and broker- dealers are still cutting back on their variable expenses," said Ms. Blecher of Gruntal. "There can't be a lot more upside. If the stocks fell back down to something below their historical range, and they had this performance, they'd definitely be a buy."
Indeed, far more analysts now cover commerical banks than investment banks. NationsBank, for instance, is followed by 34 Wall Street researchers, while Lehman Brothers is tracked by only 10, according to First Call Reports.
One reason is that while most commercial banks have long been public companies, most investment banks until quite recently were organized as partnerships.
Some analysts think the corps of investment bank-watchers will multiply as the walls between commercial and investment banking crumble. "Over time, more analysts will cover brokerages," said Ms. Roth.
Some wonder whether the investment-bank crowd won't eventually match the commercial-bank set.
"What would you rather have: no loans or volatile earnings?" Mr. Salem said. "Call it a lesser of two evils. It's the bank that's becoming an anachronism. The broker is where tomorrow is."
