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Monday, October 18, 2004

The Incredible Shrinking Investment Banks

( Via Senthil) An excellent article discussing the Financial Services market - How the Universal Banks (Commercial Banks acquiring Investment Banking expertise through organic growth or acquisitions - like Citibank and Bank One ) are beating the pure breed Investment Banks (like Merrill & Morgan Stanley.)Merrill Lynch has been shrinking, both in size and in market value. The firm has scaled back its global ambitions, shedding 23,000 jobs worldwide and pulling out of the retail brokerage business in Japan and Canada. At its peak, its total employment was 72,000.In the industry rankings known as league tables, Merrill has fallen in important categories, from stock underwriting in the United States to mergers and acquisitions advice. Universal banks like Citigroup and J. P. Morgan, with their swollen balance sheets and ripe ambitions, are encroaching more than ever on Merrill's and Morgan's turf. European banks like Barclays, Royal Bank of Scotland and HSBC are also looking to expand in the United States. Even onetime regional banks like Bank of America and Wachovia have been hiring droves of investment bankers and brokers.Merrill Lynch and Morgan Stanley, in other words, are being squeezed on all sides. "The business models of these firms may not be sustainable" Inevitably, Morgan Stanley and Merrill Lynch should align with the big balance-sheet providers. Morgan Stanley's market valuation, like that of Merrill Lynch, hovers close to $50 billion, a little more than a third that of J. P. Morgan and less than a quarter of Citigroup's. That is a far cry from the heady days of 2000, when the firm's market capitalization exceeded $100 billion. There was a time when Morgan Stanley and Merrill could punch above their own weight, given the stature of their brands and their tight-knit cultures.A Banker likened their plight to that of a competent but out-of-position tennis player: stuck in the middle of the court, and not making the put-away shots at the net or winning the deep rallies from the baseline. William B. Harrison, chief executive of J. P. Morgan, echoed that sentiment. "I think these broad-based platforms create a competitive advantage, and over time that will lead to further financial consolidation," Mr. Harrison said. "The trend is clear."
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