Bank brokerage units, which languished during last year's dismal bond and stock markets, have sprung back.
In a round of interviews, brokerage chiefs said that a surge of equity- based mutual fund sales starting in April have helped banks generate more fee-based profits than they did last year.
Though the bankers concede that their departments aren't breaking earnings records achieved in the heady years of 1992 and 1993, the upturn is a much-welcomed development.
"This should not be a terrible year for bank-based brokerages," said Edward Diamond, president of the brokerage at Dime Savings Bank of New York. "It's not the best I've seen, but its an improvement over '94."
But how meaningful these profits are to the overall banking business remains to be seen. PaineWebber Inc. banking analyst Lawrence Cohn said earnings at these units are still "peanuts" compared with the bottom line of most banks, contributing less than 1%, or about $450 million, according to data from the Federal Deposit Insurance Corp.
Indeed, profits from this business are still so much in their infancy that banks are reluctant to disclose them at all. A rare few spell out their earnings in quarterly reports. Pittsburgh-based PNC Bank Corp., for example, has been deriving about 4% of noninterest income from brokerage activities in recent quarters. And TCF Financial Corp., Minneapolis, is drawing 20% of its earning power from the brokerage business.
But for the most part, Mr. Cohn said, banks are "fussing around" with brokerage units. "It would be overstating the case to argue there was a broad-based commitment to this business by the commercial banking industry," he said.
Bankers take issue with that characterization.
"These are new businesses for most banks, and they are growing in importance as a material income producer," said Susan Rau, executive vice president of the private clients investments and insurance group, National Westminster Bancorp, Jersey City.
Ms. Rau said the investment products program she oversees continues to grow rapidly enough to satisfy her superiors. "This is not a sidelight for us," she said.
Banks are compelled to make a go at this business because more than three-fourths of consumer dollars are put outside traditional bank deposit products, she said.
Ms. Rau was guarded about her results this year, but she expects revenues to increase 15% over last year.
The contribution mutual funds and variable annuities are making to the net income of bank brokerages is a drastic improvement over last year, when sales took a nose-dive.
Kenneth Kehrer, a Princeton, N.J.-based consultant who has been monitoring profitability at 47 bank brokerages, confirms that these units are performing better this year than last.
His latest data show that brokerages' operating income averaged 38% of revenue in the first nine months of 1995. That's up a notch from 36% in all of 1994.
Bank brokerage units are seeing profit increases because sales of mutual funds this year have more than offset the losses brokerages are incurring from declines in fixed annuities. Mutual funds are attractive now because the bond market rallied early in the year, and stocks keep reaching record highs.
Brokerage heads also attribute an increase in profits to a growth in sales of variable annuities, a set of mutual-fund-like portfolios with tax- deferred features.
Conversely, fixed annuities, which helped prop up the bottom line at brokerages last year, have suffered a reversal of fortune. With a changing interest rate environment, bank customers have fled those nonfederally insured investments this year for the safety of certificates of deposit.
That mutual funds are bolstering the bottom lines at brokerages should come as no surprise, since sales have been strong industrywide.
Despite a 7% drop in net new sales from September to October, fund sales remain high, according to data released by the Investment Company Institute.
The Washington-based trade group reported that total net new sales of funds in October were $11.9 billion, compared with $12.8 billion in September.
The brokerage unit at Crestar Financial Corp., Richmond, Va., expects a 30%-to-35% jump in profits from 1994 to 1995. Annuity sales, are up 27%, said Charles F. Wright, senior managing director at Crestar Securities Corp.
"Mutual fund revenue will be within 35% to 40% of total revenues here," up from more than one-fourth last year, he said.
But the year isn't over yet, Mr. Wright points out. A stock market correction could rip into profits. "What will be the investor reaction when we do have a market downturn? How well are we prepared for that?"
At Hibernia Corp. in New Orleans, mutual fund revenues are expected to increase 18% at the end of the year. But variable annuity revenues should jump more than 100%, said Anthony Psilos, president of Hibernia Investment Securities Inc.
"We're still expecting more growth in the variable annuity category next year," he said.
Still, offsetting losses in fixed annuities with mutual funds is tough, because they have higher commissions than mutual funds. To make the same profits, "you have to sell 50% more mutual funds than annuities," Mr. Psilos said.
Just ask Mark Stevens, vice president of the brokerage unit at Salisbury, N.C.-based Farmers and Merchants Bank. He is seeing a 75% plunge in revenues that came from fixed investments, most of which were fixed annuities.
"Even with that business being that far off, mutual fund sales have helped to keep our profits strong," he said.
Earnings won't be as high as they were last year at Farmers, but that is in part because 1994 was a record year for the bank brokerage.
The units really struggling this year are the ones that emphasize fixed annuity sales over mutual funds. Mr. Kehrer said about one-third of banks report that 75% of their sales are from fixed annuities.
At TCF Insurance, a subsidiary of Minneapolis-based TCF Financial Corp., revenues from fixed annuities are down 30% from 1994.
And as this thrift increases its overall services, the brokerage unit's contribution to earnings has declined. Once contributing a third to the bottom line, the unit is now contributing less than a fifth.
"Profits may be down a bit, but nothing too significant," said Mary Sipe, president of the unit and an executive vice president with TCF.
The profit decline would have been more dramatic if the company hadn't introduced mutual funds at the beginning of last year. Compared with last year's revenues of $168 million in fixed annuities, mutual funds garnered only $27 million.
This year mutual fund revenues have almost doubled, to $45 million, compared with $50.4 million from fixed annuities.