Fee-based businesses, which have helped fuel robust bank earnings in recent years, are turning into an industry albatross, one bank analyst said.
A report by George Bicher of BT Alex. Brown said profits at the top banking companies next year may be 8.1% lower, on average, than what might have been expected.
He attributed this to the downturn in equities, which has, in turn, hammered investment banking, venture capital, brokerage, and asset management.
"The broad efforts that banks have made to diversify revenue sources have created greater exposure to market-sensitive fee revenues," Mr. Bicher said.
Banks began building these businesses in earnest in recent years to cushion themselves from the cyclicality of traditional lending. These nontraditional operations were the main contributors to earnings growth starting in the early 1990s, analysts said.
"In broadening banks' product capabilities, the most important areas to fill were the ones experiencing the fastest growth-investment services and capital markets," Mr. Bicher said.
Ironically, those companies that have made the most progress toward building fee-generating businesses-including BankBoston Corp., Chase Manhattan Corp., and Mellon Bank Corp.-stand to lose the most, Mr. Bicher said.
Though fee revenues are still expected to grow for the next few quarters-aided by less sensitive deposit and trust banking fees-they "are not going to be the barn burner they have been for the last few quarters," said Tanya Azarchs, an analyst at Standard & Poor's Corp.
Mr. Bicher's view makes several assumptions: He said he expects a 75% hit to venture capital revenues at banks next year, 25% to both investment banking and trading-brokerage revenues, 20% to gains on securities sales, and 15% to asset management revenues.
Using those assumptions, Mr. Bicher calculated that BankBoston-which has disclosed $30 million of trading losses this quarter-will post annual revenues next year that are $171.8 million, or 58 cents a share, less than what might have been expected.
Mr. Bicher said BankBoston has $89.5 million of its quarterly revenue, or 8.1% of its total revenues, exposed to market-sensitive businesses.
Chase would generate $1 billion less than hoped for in 1999 revenues, or $1.20 per share less than expected, Mr. Bicher calculated. He said Chase has $547 million of quarterly revenues, or 11.5% of its total, exposed to the market.
Mellon, with a huge asset management operation in its Dreyfus Corp. subsidiary, may see expected 1999 revenues reduced by as much as $139 million, or 52 cents per share. Mellon has $72.4 million a quarter, or 6.7% of its total revenues, in market-sensitive businesses.
Despite these glum predictions, many analysts, including Mr. Bicher, said that fee-income businesses remain beneficial to banks over the long term.
"No evolution is smooth," said Henry C. Dickson, an analyst at Salomon Smith Barney. "Earnings are volatile and vulnerable right now, but the market can turn pretty quickly."
Credit risk continues to be the biggest specter, analysts added.
"The risk of a slowdown in revenue growth is different than the risk in credit businesses," said Lawrence Cohn, an analyst at Ryan, Beck & Co.