2010 Q4 Earnings Analysis: Lots of Upside for Broker-Dealers, Banks

As many financial firms recover from the crisis, they are well positioned for a strong 2011, analysts say

Earnings season for the fourth quarter of 2011 is winding down. But, analysts say, many financial-service companies are poised for strong results in 2011, as they put issues tied to the financial crisis of 2008-09 behind them.

This is especially true for a select group of companies in the broker dealer, investment banking and asset-management sectors.

"LPL Financial's results are indeed impressive,” said Mark Elzweig, a New York-based executive recruiter in an interview Thursday. “Assets, the number of advisors and adjusted net income are all up. Getting into the RIA business was a shrewd move that seems to be paying off."

LPL Financial announced its first results as a public company on Monday. For the final three months of 2010, the largest independent broker-dealer posted a net loss of $116.6 million, or $1.20 per share, on an 11.6% increase in net revenue of $820 million.

Minus a charge of $220 million taken in the fourth quarter, largely related to its IPO, LPL’s adjusted net income rose 6.2% in the period to $44.7 million, or $0.42 per share. These adjusted quarterly earnings beat the consensus estimates of equity analysts by $0.02, while revenues came in ahead of estimates by roughly $23 million.

At year-end 2010, LPL had 12,444 registered representatives, or 494 net new advisors. Total advisory and brokerage assets rose 13% in the year to $315.6 billion.

“I think that they'll be able to continue to hit their recruiting goals of 400 new advisors per year. Wirehouse brokers [thinking of going independent] are comfortable with LPL's brand name and broad fee-based offerings,” said Elzweig (left). “The fact that they are a public company makes advisors of all stripes feel that they are financially solid.” 

More broadly, “It looks like broker dealers are doing well in general and are well positioned to continue on that path this year. Rising markets are coaxing more investors back into the game,” Elzweig shared.

Morgan Stanley reported earnings in late January of $867 million, or $0.43 per share, vs. $460 million, or $0.18 a share for the same year-ago period. Net revenues were $7.8 billion for the quarter compared with $6.8 billion last year.

Analysts had expected earnings of $0.35 a share on sales of $7.35 billion.

Morgan Stanley said its global wealth-management unit had net inflows – or net new client assets – in the fourth quarter of 2010 of $14.1 billion vs. outflows of $6.8 billion in the same year-ago period. Inflows in the third quarter of 2010 were $5 billion.

MSSB now includes 18,043 financial advisors, down 1% from 18, 135 a year ago and off slightly from 18,119 in the third quarter of 2010. Average revenue (or gross production) per advisor now stands at $742,000, an increase of 7% from $692,000 last year and 6% from $686,000 in the third quarter.

Morgan Stanley’s revenues per FA do “look great,” says Chip Roame of the consultancy Tiburon Strategic Advisors, and this figure is getting closer to that of UBS and Merrill Lynch. “The stock market being up drives AUM revenues higher,” he added in an interview.

Total assets for wealth management are $1.67 trillion as of the fourth quarter of 2010, or about $92.5 million per financial advisor, up from about $86 million per advisor a year ago and $88.5 million in the third quarter of 2010.

“Retail firms of all stripes have a renewed sense of optimism and confidence and are scrambling to boost both the numbers and quality of their salesforces,” said Elzweig.

“The fourth-quarter results are obviously a huge step forward,” said Roame. “It’s hard not to judge [the change in net asset flows from] -$6.8 billion to +$14.1 billion as anything other than a turnaround.”

Still, Roame points out, this net new money equates to roughly $781,500 in net new assets per FA in the fourth quarter – i.e., less than $1 million in net new assets per advisors. Also, the consultant asks, how do Morgan Stanley’s net asset flows compare to those of Charles Schwab’s?

In the fourth quarter, Schwab’s Advisor Services unit had net inflows of $16.4 billion, topping Morgan Stanley’s results by $2.3 billion. For the year, Schwab’s unit had net inflows of nearly $50 billion vs. $22.9 billion for Morgan Stanley. “So is this progress for Morgan Stanley?” Roame asked. “Yes. But is it stunning? No.” 

Banks, Asset Managers

Richard England of Atlanta Capital Management, the sub-advisor of the Calvert Equity Portfolio, says that the performance and results of some companies in the banking sector, like Wells Fargo and JPMorgan, are looking very robust.

“The banks’ [stocks] had a strong surge in the fourth quarter, December especially, to the point where financials as a sector had been a laggard for the year through November 2010 and had a strong enough December that they outperformed for the year,” the portfolio manager explained in an interview.

Asset managers like T. Rowe Price and the mutual fund company Franklin Resources, have stocks that tend to move with the stock market, “because they generate their revenues based on a percentage of AUM,” England (left) said. “When the market is rising like it did in 2010, except in the middle of the year, you have pretty positive estimate revisions and earnings were going up for those stocks, so those do well.”

T. Rowe Price Group said in late January that it had a 26% rise in profits, with net income of $191.6 million, or $0.72 cents a share, in the fourth quarter of 2010 versus $152.5 million, or $0.57 cents a share, in the year-ago period.

It also reported fourth-quarter sales of $647.5 million versus $542.6 million in the fourth quarter of 2010. Equity analysts had expected that T. Rowe would earn $0.69 cents a share on sales of $638.7 million.

Assets under managementwere $482 billion in the fourth quarter, up $42.3 billion from the quarter ending Sept. 30, including $282.6 billion in the T. Rowe Price mutual funds distributed in the United States. Net cash inflows in the fourth quarter 2010 totaled $6.9 billion, and market appreciation and income added $35.4 billion to assets under management. 

Year-end assets under management (AUM) grew nearly $91 billion, or 23%, from $391.3 billion at the end of 2009. Net cash inflows from investors totaled $30.3 billion for 2010, and market appreciation and income added $60.4 billion during the year.

For Morningstar equity analyst Gregory Warren, what separates the best-performing asset managers from their weaker rivals is their product portfolio. Firms like T. Rowe Price and Franklin Resources have diverse product offerings that have benefited from investor interest in fixed-income and international funds.

Some investors have soured recently on fixed income, mainly due to issues with municipal bonds, Warren says. But investors working with RIAs or advisors are moving more money into equities.

Still, he notes, there are many investors who do not want to get burned. “They are feeling that they have too many hurdles still to get over,” Warren said in an interview. “So, will this be a great year for equities? I’m not sure. Look for things to move in fits and starts.” And this could mean more mixed results for the asset-management sector overall, he adds.

The banks, in contrast, “are likely to have among the strongest earnings growth of any industry in 2011,” England says. “Banks are likely to post very strong double-digit earnings growth this year. Not only are we continuing to reduce the provisions for bad loans as delinquencies improve, but we’re also beginning to put new loans on the books that help them grow the top line.”

Read AdvisorOne's 2010 Q4 earnings calendar for the financial sector for release dates and links to earnings stories.

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