The year just passed has been one of the most remarkable on record for the financial services industry. Indeed, for many market participants, the changes witnessed over the previous 12 months were once thought inconceivable. Bear Stearns and Lehman Brothers, two iconic names on Wall Street, are no more. Freddie Mac and Fannie Mae were seized by the U.S. government, Merrill Lynch was absorbed by Bank of America, and Goldman Sachs and Morgan Stanley are now bank holding companies. The housing industry has imploded, politicians and regulators are chomping at the bit to reverse how Wall Street does business, and investors are downright spooked.
But we already know all that...
Less clear is how these dramatic shifts on Wall Street and in corporate America will impact insurers, financial services companies, investors and other businesses this year. With that in mind, we offer the following prognostications. Some will prove accurate, others may not, but given where we are in the current business cycle, they’re all worth considering. (These predictions were solicited from the staff of Insurance Networking News,
Insurance
Credit pressure from the financial sector will cause further staff shrinkage and market consolidation, as insurers look to either acquire or merge to gain access to more capital or critical mass. IT spending will be relatively flat in 2009, with greater emphasis placed on green initiatives (both for benevolent purposes and for short- and long-term cost-cutting), cloud computing and SaaS. With one possible exception--risk management technologies—the investment in large projects, such as core systems or legacy replacement already in play, will not be cancelled; however, those in planning stages will be placed on hold. Further, regulatory compliance will take center stage due to the attention on financial services and new administration. These factors will contribute to a Donnybrook as insurers battle potential legislation (for example, the SEC targeted indexed annuities this week). Finally, in light of market conditions, competition will be as heated as ever. Insurers will vie for targeted/segmented business. (Insurance Networking News)
Mutual Funds
Fund companies are fearing steep declines in assets at least over the next two quarters. In the first 10 months of 2008, mutual fund assets overall fell by 20%, and many firms have lost as much as 30% of their assets under management. Investors are likely to continue fleeing to the safety of fixed-income and money market funds, and some firms will have no choice but to continue laying off staff. Large firms with stellar reputations; strong fixed-income and money market lineups; and the deep pockets to continue partnering with financial advisers and advertise sound investing to customers will increase market share in the new year, while smaller fund companies or asset management units will be acquired or face market-share erosion. (
Investment Banking
In a year that saw nearly every aspect of the capital markets turned upside down, perhaps no industry was more impacted than this one. Besides the crumbling of household names on Wall Street, events conspired against the remaining firms in a way that will leave those institutions less able to take on risk. At the same time they’ll find themselves more beholden to regulators. Earnings derived from investment banking operations will be down dramatically this year, not only in some of the more exotic sides of the business but in traditional deal-making and stock issuance, too. While the ulge-bracket banking universe has shrunk, Wall Street is beginning to see consolidation among middle-market firms, a trend that is likely to continue. (
Private Equity
Private equity firms are expected to be largely focused on restructuring their own portfolio companies because of the recession and crippled debt markets. Despite lower valuation multiples that create acquisition opportunities, the lack of credit coupled with continued high seller expectations will reduce the number of leveraged buyouts. Transactions will get done, especially involving smaller companies and corporate business units, but industry observers expect that financial sponsors will compensate by structuring transactions that aren’t dependent on debt, as well as look towards investing in distressed debt, restructuring and bankruptcy acquisition opportunities. In addition, fundraising activity will slow because institutional investors have less capital to allocate towards the alternative investment asset class. Corporate acquirers and sovereign wealth funds, meanwhile, will gain the upper hand in the M&A business. Cross-border acquisitions will draw interest from private equity firms, but investments in emerging market countries will be more muted next year as even well-developed emerging market countries grapple with the fallout from the US recession. The theme throughout next year will be a flight to safety. (
Bank and Thrift Consolidation
Many who keep an eye on banking M&A—and here you can count some banking CEOs, not just wishful investment bankers—think 2009 could be one of those years that significantly alters the landscape, taking out hundreds of companies, if not more. The factors playing into that forecast are obvious enough – the current recession’s severity and length foremost among them. Another catalyst could emerge as it becomes clear who won’t be getting access to TARP (and $700 billion only goes so far). And where once perceived sellers carried takeover premiums, market prices are now at much lower multiples to book value, which may help would-be buyers find the willpower to put down some bids. A trend that began in late 2008 is likely to continue as the government plays matchmaker with failed or near-failed institutions, with Tarp playing a role in financing, such as in the case of PNC-National City. (
IT
IT executives will be watching their budgets -- especially when it comes to nonessential hardware purchases, such as PC upgrades --- but they will spend on technologies and services that make their organizations more efficient. This includes server virtualization products, on-demand (hosted) software services, green IT initiatives, and data management improvement efforts -- including master data management, predictive analytics and business intelligence projects. Other technologies that will be increasingly deployed in 2009: Web services, enterprise mash-ups, unified communications, and social networks. IT managers, however, will continue their struggle to digest and control employee usage of social networking and other Web 2.0 tools. (Insurance Networking News,
M&A
The market for M&A will likely remain stalled in 2009, as both acquirers and targets sit on their hands in what has become an uncertain market. As the economic picture dims, neither side can find any comfort in forecasts, which makes modeling deal extremely difficult in all but a few sectors. Industries such as retail, publishing, energy, manufacturing and homebuilding could be marked by distressed activity, while a few select areas, such as healthcare, could experience more traditional M&A interest from both strategic acquirers and private equity buyers. Alongside the uncertainty facing dealmakers is a financing market that remains essentially shut down. Deal pros, by and large, don’t anticipate the debt markets will begin to show signs of life until there’s more clarity about the economy. (
Regulation, Regulation and More Regulation
Credit card practices, mortgage disclosure, suitability standards, loan modifications, executive compensation, ratings-agency status, overdraft guidelines, Basel II deadlines: There may be no area of financial services where rules don’t get tightened in the coming year. And it won’t just be regulators leading the charge; leading members of the newly-elected Congress have made it clear that they’ll be pushing for change—either in tandem with agencies or with an eye to filling what they perceive as gaps in existing oversight. Even if certain areas of regulation stay the same, the disappearance of vast swaths of unregulated (or lightly supervised) financial services means a much bigger piece of the industry is now under the watch of the Federal Reserve, in some cases by choice. A corollary to this prediction—reg-relief campaigns get back-burnered for a long, long time. (
Credit Cards
Expect credit card issuers to pull back on the number of cards they issue and amount of credit they offer in response to rising delinquencies and charge-offs. Add investor skittishness spreading to credit card asset-backed securities and new federal rules that strictly limit how issuers can set and charge interest on credit card accounts, and you have a perfect storm for cutbacks in card offers and credit availability. Analysts widely predict charge-offs will continue to increase into mid-2009 and delinquencies, by one estimate, to reach as high as 1.4% of receivables by the end of the year. But while the credit card industry retrenches, look for growth in the debit card market as more consumers use the cards to control their spending and debt. (
Outsourcing
New federal rules, such as one requiring issuers to apply cardholder payments to higher-interest charges first, and the need to comply with regulations designed to boost transaction security will put added pressure on some issuers to farm out their processing challenges to third parties. Smaller financial institutions will likely continue to sell or farm out their processing operations to third parties to raise capital or save money. The effect of turmoil in the banking and retail sectors will not be a one-way street for third-party payment processors, though. Bank consolidation has meant some lost accounts for processors such as Total System Services Inc., whose card-processing customers Washington Mutual Inc. and Wachovia Corp. recently were taken over by JPMorgan Chase & Co. and Wells Fargo & Co., respectively. Chase plans to process WaMu’s cards in-house. (
Securitization
It remains a bleak picture for ABS, with issuance expected to be focused on credit cards and autos, with a smattering of student loans. However, in each of these areas problems remain. In credit cards, for instance, there is proposed egulation that would prevent credit card lenders from charging high interest rates, which would in turn lessen the excess spread on deals. The credit card industry is also facing historically high charge-offs in the coming year. For autos, headline risk is still a key factor because of the potential for bankruptcy within the Big 3, though both AmeriCredit and Nissan closed deals in late 2008. These deals, however, are only getting partial funding as the bottom pieces are still not getting bought by investors. (
Credit Derivatives
Credit derivatives took a reputational beating in 2008, receiving much of the blame for the financial crisis. Next year, however, the much-maligned sector will become far more transparent and systemic risk will be greatly reduced. Though dealers have long resisted the exchanges’ efforts to gain a foothold in the credit default swaps arena, regulatory pressure and concerns about counterparty risk have made it inevitable. At least four major market centers will launch central counterparty services this year and regulators, who will mandate price reporting, will prod the industry to trade the more standardized credit default swaps on exchanges or other venues. For firms that operate screen-based trading platforms, that will prove a major boon, as U.S. volumes of electronically traded credit derivatives will skyrocket. (
Trading
In a new regulatory environment, a number of long-standing trading issues, such as soft dollars (how the buyside pays for services with client commissions) and dark pools, are likely to be addressed. Also expect hedge funds to come under greater regulation, which will certainly affect brokers' trading and prime brokerage services. Brokers have geared their business toward hedge funds for the last several years and their bottom line would definitely feel the impact of a shrinking hedge fund universe. We’re also likely to see the buyside continue to direct more of its trades once the current volatility abates. Currently, due to volatility, brokers/sales traders have been handling more orders for their clients. That has gone against the trend of the buyside doing more self-trading over the last several years. (
