While the world's stock markets edge lower, investment banking - and particularly brokerage - stocks are heading south along with them. Suddenly bonuses don't look quite so big after all.
"If you're worrying about the equity markets, the last thing you want to do is to own a lot of high beta stocks which are susceptible to market movements," says Dick Bove, an analyst at New York-based Punk Ziegel & Co. "Sixty percent of the earnings of the brokerage group as a whole came from trading in 2006, up from 40 percent in 2004. In these conditions, the main concern is that this key part of the business is going to slow."
Which banking stocks are liable to lose most? Bove points to Lehman Brothers, Bear Stearns and Goldman Sachs, which are particularly exposed to trading. The more predictable investment banking business generated 14 percent of revenues at Goldman last year, but 18 percent at Morgan Stanley, for example.
"A 10 percent move in the stock market will move Goldman 18 percent and Lehman 17 percent," says Bove. "It's great on the way up, but not so great on the way down."
It's also not so great if you happen to be holding a lot of stock in one firm, although headhunters say banks like Merrill Lynch have significantly reduced the proportion of bonus paid in restricted stock.
Bove says investment bank stocks could have further to fall. "Brokerage stocks are still trading at very high valuations - Goldman Sachs is in the top 10 percent of its historic trading range," he points out.
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