NEW YORK (CNNfn) - As the threat of a recession looms ever closer, financial services firms will suffer at first but ultimately withstand the crisis. In fact, property/ casualty insurers may even prosper as the recent terrorism will likely cause rates to rise, analysts said.|
The most direct impact on the financial sector, outside of the massive loss of life and destruction of the New York's World Trade Center, is the loss of four days of trading. When trading did return earlier this week, the leading market indices dropped 7 percent to their 1998 lows and by Wednesday had posted three days of decline.
Investment banks and brokers were set to show dismal earnings results even before the WTC destruction. M&A volume has dropped by 54 percent so far in 2001 to $614 billion, while initial public offerings have crawled this year, according to data from Thomson Financial.
The drop-off in mergers and IPOs has caused the profits of top U.S. investment banks to dive in second quarter and the outlook for the third quarter wasn't expected to be any better.
Throughout the first three quarters, many investment banks were hurt by the decline in volume and volatility but the recent surge in volume may have offset those lost 4 days, said analyst Mark Constant, of Lehman Brothers.
"It would be ridiculous to suggest that any of the publicly traded firms would be going out of business," he said. "We missed a couple days of trading, and there will be one time charges, but the business will go on."
Some investment banks—Morgan Stanley, Bear Stearns, Lehman Brothers Holdings and Goldman Sachs Group Inc.—will report their quarterly earnings without showing impact from the WTC attack. These banks ended their quarters on Aug.30 and will report the effect in the latter quarter.
New York-based Morgan Stanley (MWD: up $0.39 to $38.01, Research, Estimates) will report Friday before the bell, Goldman Sachs (GS: down $0.52 to $65.23, Research, Estimates) plans to announce on or around Sept. 26, Lehman is slated for Sept. 25 and Bear Stearns is also expected Sept. 26.
But companies like Merrill Lynch, JP Morgan and Citigroup Inc., whose quarters end Sept. 30, will not report the impact for several months.
Financial conglomerate Citigroup (C: down $0.46 to $35.90, Research, Estimates), with its diverse assets, is expected to best withstand the WTC attack and its long-term impact, analysts said. The New York-based company was expected to exceeding Wall Street's estimates of 72 cents a share.
Earlier this week, Citigroup warned that it expects to shave 12 to 14 cents off its third-quarter results, due to the WTC attack. But "it sounds like the rest of Citigroup's business is healthy outside of Travelers," Fox-Pitt's Tierney said.
The mostly likely to suffer will be Lehman Brothers, analysts said.
Boosted by a strong fixed income business, Lehman Brothers posted unexpectedly strong results in June for its fiscal second quarter, overcoming a slowdown in investment banking. Lehman (LEH: down $1.64 to $45.00, Research, Estimates) posted such a strong second quarter than the company will have a hard time following up, Tierney said.
First Call expects Lehman to report third quarter earnings of $1.08 a share.
While investment banks will likely shrug off the lost trading days, online brokers are already showing the impact. Trading losses could cost online brokers from 3 to 6 percent of revenue this month, said analyst Rich Repetto, of Putnam Lovell.
Before the WTC attack, online brokers such as Charles Schwab Corp., E*Trade Group Inc. and Ameritrade were already on shaky ground due to drops in online trading, and were instituting cost cuts.
The rise in volume this week probably isn't enough to offset the loss of four trading days. "EPS will likely come down because of the four day market closure," Repetto said.
Charles Schwab, the nation's largest discount broker, said Wednesday that the loss of 4 trading days may cause it to shave third quarter EPS by a penny. Schwab lost $20 million in revenue because of lost trading.
Ameritrade (AMTD: down $0.16 to $3.48, Research, Estimates) also lowered guidance and now expects 5 to 8 cents a share losses for its fourth fiscal quarter. The Omaha, Neb.-based Ameritrade didn't specifically cite the terrorist attack for the drop.
It will be difficult for Ameritrade to achieve its goal of break-even for the fourth quarter and the company may be achieving the limits of its newly amended credit agreement, Repetto wrote in a research note Thursday.
Earnings tracker First Call had expected Schwab to post 6 cents profit for third quarter while Ameritrade is seen reporting a 1 cent loss.
Analysts picked Schwab (SCH: down $0.25 to $8.69, Research, Estimates) as most likely to withstand the current crisis. However, 40 percent of Schwab's revenue comes from asset-based fees. "But with the market depreciating so much, even those are getting hit," said analyst Gerard Cronin, of McDonald Investments.
E*Trade (ET: down $0.29 to $4.60, Research, Estimates) will also stay afloat because of its banking arm, which gives it a diverse source of revenue. However, Ameritrade is most exposed because their entire revenue stream comes from trades, Cronin said.
"[The loss of trading days] will hurt Ameritrade the most because that's all they do," Cronin said.
But the real issue is the long term effect of the terrorism on consumer and investor sentiment. Online brokers were already shaky, cutting expenses and staff in an attempt to adjust to the drop in trade volumes. Any sign of a recovery for the sector won't come this year, Cronin said.
Insurance shares took a pounding on Monday when the markets opened for trade. At one point, General Electric, which through a subsidiary provides reinsurance, dropped nearly 21 percent Monday before rebounding.
Last week's terrorist attack on the WTC likely will cost insurers billions of dollars and could even surpass the costs of Hurricane Andrew in 1992. Insurers paid over $19 billion for that natural catastrophe. U.S.-based insurers, as well as international providers, are expected to foot the bill. The National Association of Insurance Commissioners said Monday that losses are expected to reach or even surpass $20 billion while others said claims could hit $30 billion.
AIG, the largest commercial provider in the United States, said last week that it expects pretax losses of about $500 million from the WTC attack. On Thursday, Berkshire Hathaway Inc. said it expected $2.2 billion in pretax losses from claims due to the WTC attack.
But property/casualty provides such as Chubb (CB: up $0.41 to $59.00, Research, Estimates) , AIG (AIG: down $1.98 to $66.92, Research, Estimates), Hartford and Travelers will benefit long term, said analyst Steve Musser, of A.G. Edwards.
"Rates for commercial insurers are gonna go up," he said.
Larger institutions, like AIG (AIG: down $1.98 to $66.92, Research, Estimates), will weather the crunch best and be able to take advantage of the rate hike. But some reinsurers, such as Odyssey Re Holding Corp., may not survive. New York-based Odyssey Re (ORH: down $0.24 to $11.29, Research, Estimates) , one of the nation's top 10 reinsurers, recently went public in June.
However, the WTC attack will not impact life insurers very much, said analyst Colin Devine, of Salomon Smith Barney, who estimates total cost for the industry at $3.5 billion to $5 billion.
Last Friday, MetLife Inc. said it would incur losses from the WTC destruction of about $250 million to $300 million. In contrast, John Hancock Financial Services Inc. does not expect the WTC incident to materially impact earnings.
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Unlike property/casualty insurers, the destruction will also not cause rates for life insurers—such as Metlife (MET: down $1.38 to $25.05, Research, Estimates), Prudential, New York Life—to rise.
"On the life insurance side, this will represent less than 3 percent of equity," he said. "There is not one company that can't very comfortably absorb those costs."
In fact, the terrorist attack last week may provide a bonus for life insurers. Many people will be looking to expand their life insurance or at least revisit their coverage, he said.