Banks discover money management again as trading declines

TCW Sale

In August, Societe Generale SA, France’s second-largest bank by market value, sold money manager TCW to its management and Carlyle Group LP in a deal valued at $700 million to $800 million, people familiar with the matter said at the time.

Amid the disposals, banks were coping with record-low interest rates in the U.S. and Europe, higher capital requirements under rules adopted by the Basel Committee on Banking Supervision and the 2010 Dodd-Frank overhaul of financial regulations, which limits income from trading.

The net interest margin, the difference between what the lenders pay for deposits and charge for loans, dropped to 3.26 percent in the third quarter of 2012, from 3.85 percent in the first three months of 2010 at U.S. banks with more than $15 billion in assets, Federal Reserve data show. Investment-banking and trading revenue at the 10 largest global investment banks fell at least 17 percent in each of the past two years and was up 3.3 percent in the first nine months of 2012, according to data from industry analytics firm Coalition Ltd.

Gaining Share

As trading and investment banking slumped, managing investor money accounted for a greater percentage of fees. The median share of net revenue generated by asset and wealth management for a group of banks increased to 28 percent in 2012 from 23 percent five years ago, according to Johnson Associates Inc., a New York-based consultant. The share contributed by trading declined to 43 percent from 49 percent over the period, and investment banking fell to 14 percent from 15 percent.

Asset managers typically manage money for clients in comingled pools such as mutual funds, exchange-traded funds and private portfolios. Wealth management caters to rich individuals and involves a range of services including asset allocation, tax planning and estate planning.

Companies that operate networks of financial advisers, such as banks and brokerages, have run afoul of regulators in the past over conflicts of interest related to the sales of some mutual funds. While these advisers, unlike registered investment advisers, don’t have a legal duty to act in the best interest of their clients, regulators have punished companies for pushing the sales of proprietary funds, or funds that generate more revenue for the firm.

‘Huge Plus’

Shareholders have rewarded banks that held onto money- management units while punishing firms that didn’t. JPMorgan and Goldman Sachs, which expanded its businesses, are the two best performers in the 10-member Bloomberg Industries Global Investment Banks index over the past five years. Citigroup and Bank of America, which agreed to sell Columbia Management Group in 2009, were among the worst.

“Having an asset-management division is a huge plus when I’m investing in a financial company,” said David Herro, the Chicago-based manager of the $10 billion Oakmark International Fund. “This is a stable and steady cash-flow item.”

Oakmark International, which has beaten 98 percent of its peers over the past five years, holds shares of Credit Suisse and Allianz SE, the German insurer that owns Pimco.

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