Financial services

From Academic Kids

Template:Mergefrom Financial services is the largest industry (or category of industries) in the world in terms of earnings (20% of market cap in the S&P 500 in 2004 (http://www.contraryinvestor.com/2004archives/mofeb04.htm)). Financial services is a term used to refer to the services provided by the finance industry. Banks, insurance companies, investment banks, and brokerages, are examples of the types of firms forming this industry: They provide money and investment and related services.

Contents

USA: Gramm-Leach-Bliley Act

The term financial services became more prevalent in the US partly as a result of the Gramm-Leach-Bliley Act of the late 1990s which enabled different types of companies in the US financial services industry to merge. Critics of this act say the term financial services attempts to make the unison of these operations sound natural, ignoring the possible problems from combining them, such as conflicts of interest and monopolization. Others, noting that many of the restrictions abolished by the Gramm-Leach-Bliley Act had never existed in other countries or had been abolished earlier than in the USA, say the term financial services is a natural one in long term use which means nothing more than its constituent words.

In the USA almost every company now which previously described themselves as a bank, insurance company, or brokerage house, now describes themselves in some way as a financial services institution. Allstate Insurance, for example, now provides CDs and investment brokerage services. Bank of America offers full featured brokerage products, while E-trade has expanded into offering bank accounts and loans. Companies usually have two distinct approaches to this new type of business. One approach would be a bank which simply buys an insurance company or an investment bank; keeps their original brands; and adds it to its holding company simply to diversify its earnings. Outside the United States, for example in Japan, it is also permitted to have non-financial services companies within the holding company. In this scenario, each company still looks independent, and has its own customers, etc. This is essentially the style of Citigroup and JP Morgan Chase.

In the other style, a bank would simply create its own brokerage division or insurance division and attempt to sell those products to its own existing customers, with incentives for combining all things with one company. This is the style of Washington Mutual and Wells Fargo.

Market

Financial services is the largest group of companies in the world in terms of earnings and equity market cap. It is not the largest category in terms of revenue or number of employees. Financial services, while as a whole industry is slow growing, is also extremely fragmented, with the largest company (Citigroup), only having a 3 percent US market share. See page 11, "The Opportunity: Small Global Market Share", of Sanford C. Bernstein & Co. Strategic Decisions Conference - 6/02/04 (http://www.citigroup.com/citigroup/fin/data/p040602.pdf) for the 2003 market shares of Citigroup.

In contrast, the largest home improvement store in the US, Home Depot, has a 30 percent market share, and the largest coffee house Starbucks has a 32 percent market share, etc. Despite this fragmentation, these companies are as a group by far the most profitable in the world, and if any grew to the same market share percentages as any other retail industry, the potential profit would be enormous.

2004

S&P 500 index (500 large american companies) market cap 2004 ([1] (http://www.streetauthority.com/terms/index/sp500.asp))

  • Financial Services: 20.30%
  • (Computer hardware & software: 15.30%) (as comparison to 1999)
  • Healthcare: 13.40%
  • Industrial Materials: 12.20%
  • Hardware (computer hardware): 10.80%
  • Consumer Goods: 9.70%
  • Consumer Services: 8.80%
  • Energy: 6.50%
  • Software: 4.50%
  • Business Services: 3.90%
  • Media: 3.90%

1999

S&P 500 index (500 large american companies) market cap in 1999 ([2] (http://www.contraryinvestor.com/moarchive2000/mo011100.htm))

  • Technology (hardware, software): 29.8%
  • Financial: 13.1
  • Consumer Staples: 11
  • Consumer Cyclicals: 9.2
  • Healthcare: 9
  • Capital Goods: 8.4
  • Communication Services: 8
  • Energy : 5.5
  • Basic Materials: 3.00%
  • Utilities: 2.3
  • Transportation: 0.7

Industries

"Industries" in the "industry". Product set of financial services firms. The core products are transaction services (customers are consumer and corporate), trading and derivatives (consumer and corporate), debt & equity structuring (structured finance) (corporate), asset management (consumer and corporate), financing (debt & equity) (consumer debt, corporate debt & equity), advisory (on M&A and integrated in other products, for example structured finance and derivatives) (corporate), insurance (consumer and corporate).

Product set of large firms

Citigroup [3] (http://www.citigroup.com/citigroup/about/productlines/index.htm)

  • Four business groups Global Consumer Group, Global Corporate & Investment Banking Group, Global Investment Management, and Global Wealth Management
  • Nine product lines - Cards, Consumer Finance, Retail Banking, Capital Markets & Banking, Global Transaction Services, Life Insurance & Annuities, Asset Management, Private Client Services, Private Bank

JPM [4] (http://www.jpmorganchase.com/cm/cs?pagename=Chase/Href&urlname=jpmc/about).

  • Six lines of business - Asset & Wealth Management, Card Services, Commercial Banking, Investment Banking, Retail Financial Services, Treasury & Securities Services

Asset management

Products and strategies include separately managed accounts, mutual funds, closed-end funds, college savings programs, hedge funds, and non-investment and investment grade credit structures.

Commercial banking

Consumer and commercial banking provide loans to consumers. Retail banking is sometimes the same, but with a focus on transaction services, bank accounts, and ATMs.

>Retail banking

Provide branches and ATMs for payments and transactions and asset management products.

Insurance

Main article: Insurance

Insurance and annuities. Life insurance, retirement insurance, health insurance, property & casualty insurance.

Investment banking & advisory

Investment banks (capital market banks) underwrite debt and equity. Assist on company deals (advisory services, underwriting and advisory fees). Structure debt in to structured finance products.

>Financial advisory

Main article: Financial advisory services

This market space is categorized by Yahoo! as "Diversified Investments", in it are firms like Evercore Partners (Yahoo! profile (http://biz.yahoo.com/ic/99/99628.html)) which was founded by former deputy treasury secretary Roger C. Altman. High valuations on peer advisory businesses made the company announce plans for an Initial Public Offering on 06/01-2005.

>M&A

Main article: Mergers & acquisitions

>Underwriting

Main article: Underwriting

Private bank

Full service bank, for wealthy individuals. Products include management and investment advisory services as well as access to capital markets, trust services and estate planning, tailored financial structures, investment banking services, lending and other traditional banking products.

>Private client

Provide wealth management and financial planning.

Transaction services

Transaction services provides cash management, treasury, trade finance, custody, clearing, depository receipt, agency trust services, and fund services and offers integrated reporting and management to financial institutions, corporations, and governments that have assets and business in multiple countries.

>Cards

Credit and debit cards ("bank cards"). Citigroup is the largest issuer with 150 million cards at the end of 2004.

>Custody services

Custody services and securities processing is a kind of "back-office" administration for financial services. Assets under custody in the world was estimated to $65 trillion at the end of 2004 ([5] (http://www.globalcustody.net/default/custody_assets_worldwide/), [6] (http://www.cm1.prusec.com/rschrpts.nsf/$$rschidxw/4A2ACD93260C58E785256FA3005F8D0E/$FILE/PROCESSINGPRIMER25-0076.PDF)).

>Payment systems

Transaction services and payment systems include cards, checking. Payment management systems through internet. Connection to accounts and checking accounts.

>Securities trading

Main article: securities exchange

Trading market services for trading of debt & equity securities and derivatives of those.

Glossary

Glossary for reading financial services reports

Acronyms

  • NCL - net credit losses - cost of charge-offs, written off debt ([7] (http://www.cardreport.com/credit-problems/charge-off.html))
  • NCL rate - net credit loss rate - the percentage of the lending portfolio that is not expected to be repaid ([8] (http://www.thestreet.com/markets/rebeccabyrne/10049119.html))
  • NII - net interest income - interest income less interest cost
  • NIM - net interest margin - margin between interest income and interest cost
  • NPA - non performing assets - interest bearing assets not paying interest

Large financial services companies

  1. Citigroup (bank)
  2. JP Morgan Chase & Co (bank)
  3. American International Group (insurance)
  4. Bank of America (bank)
  5. Fannie Mae (credit)
  6. Freddie Mac (credit)
  7. HSBC Group (bank)
  8. ING Group (insurance, bank)
  9. Royal Bank of Scotland (bank)
  10. Berkshire Hathaway (insurance)
  11. BNP Paribas (bank)
  12. UBS AG (bank)
  13. Wells Fargo (bank)

Industrial companies with large financial services operation

  1. General Electric (insurance, credit, through four subsidiaries ([9] (http://www.ge.com/en/company/investor/GEFinancialStrength.htm)))
  2. General Motors (credit through GMAC)
  3. Toyota Motor (credit)
  4. DaimlerChrysler (credit)

See also

External links

Industry overview

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