Merrill Lynch Is Set to Move Into Banking
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By PATRICK McGEEHAN at NYTIMES
For more than a year now, Wall Street analysts have been
wondering whether Merrill Lynch & Company, the nation's
biggest brokerage firm, would buy a commercial bank or be bought by
one.
Now comes the response from Merrill: Why not just be a bank?
The firm is preparing to make its biggest push to compete with banks for
customers' deposits. Merrill is taking advantage of recent changes in
national banking laws to roll out new banking services, including a
federally insured, interest-bearing account tied to its customers'
investment accounts.
Merrill brokerage executives also are developing the first new version of
the firm's Cash Management Account, which broke new ground 25 years
ago by combining interest-bearing checking with a standard brokerage
account that held stocks and bonds. The new version, known internally at
Merrill as CMA 2.0, would allow customers who are queasy about
mixing investments and savings to choose how to segregate various
assets within the account.
"We know that the vast majority of our clients have a fairly significant
amount of money at banking institutions," said John L. Steffens, a vice
chairman who runs Merrill's brokerage operation. "I think we're offering
a better deal than banks."
In a Merrill cash management account, all the cash that is not invested in
securities is regularly swept into a money-market fund that pays
dividends; for taxable funds, the current yield is 5.43 percent. But that
cash, which amounts to about $118 billion, is not guaranteed by the
Federal Deposit Insurance Corporation, as most bank deposits are.
Beginning in June, Merrill plans to automatically switch the cash that is
being swept into taxable money market funds over to insured accounts at
two banks Merrill owns.
Because Merrill owns two banks, it will offer federal insurance on up to
$200,000 per account, twice the per-account limit for deposit insurance.
The firm's banks, in turn, will use the cash deposits to finance their
lending and investing activities.
"What the brokerage firms couldn't have previously was insured
deposits," said Joan Solotar, an analyst with Donaldson, Lufkin &
Jenrette. "Now, with the financial services reform legislation, there is no
banking product that the brokerage firms can't offer."
Merrill would not be the first financial services firm to offer insured
deposits. The American Express Company has such an account
through its online bank.
After Congress repealed the Depression-era regulations known as the
Glass-Steagall Act of 1933 last fall, some analysts predicted a wave of
mergers among banks, brokerage firms and insurance companies. Ms.
Solotar said at the time that she thought the changes were "less of a
mergers-and-acquisitions event than an opportunity for the brokers to get
into other businesses."
Ms. Solotar said the new products provided Merrill with "a huge
opportunity" to draw customers away from commercial banks, which pay
significantly lower rates on deposits than Merrill is considering.
She said she expected similar offerings from other brokerage firms, like
Charles Schwab, which has said it will buy the private-banking
company U.S. Trust Corporation.
"This will show that it is not a zero-sum game in retail brokerage," Ms.
Solotar said. "It's not just Merrill Lynch versus Schwab. It's Merrill and
Schwab versus the consumer banks, which currently don't seem well
prepared."
Guy Moszkowski, an analyst with the Salomon Smith Barney unit of
Citigroup, estimates that no more than 30 percent of all investment
assets in the United States are held in accounts at brokerage firms. Still,
he said, that is double the market share the brokerage firms had a decade
ago and most of the gain has come at the expense of banks and insurance
companies.
In the second half of last year, after Merrill introduced an all-in-one
brokerage account that provided unlimited stock trades for a preset
annual fee, Merrill and Schwab showed that they could simultaneously
rake in new assets at a fast pace. Investors had worried that Merrill's
profit margins would shrink because it was charging too little, less than 1
percent of assets in many cases, for the new account, known as
Unlimited Advantage.
The potential gains to Merrill from introducing the new banking products
could go "a long way toward offsetting a lot of the erosion that some
people have been concerned about in the profitability of their retail
commission business," Mr. Moszkowski said.
Merrill is not making any projections about the impact the banking
products could have on its earnings but analysts think it could be
significant. Mr. Moszkowski said a conservative, back-of-the-envelope
estimate was an increase of 50 cents a share in Merrill's annual earnings
after the transition to the insured accounts is complete.
"They're going to be able to offer a product that is more profitable for
them, and more attractive to the customer, than the money market is,"
Mr. Moszkowski said. "If Merrill wants to do this bank lending and they
can't fund it this way, they have to go out into the market and buy that
money and they'll buy that money at higher prices."
Merrill can afford to offer higher rates than banks offer because it does
not have to factor in the costs of operating its network of branches, as
banks do, Mr. Moszkowski said. Merrill's 730-branch system already is
profitable, from selling stocks, bonds and mutual funds, so the firm can
treat the bank products as virtually costless and consider them profitable
even though there will be a relatively slim gap between what it charges for
loans and what it pays for deposits.
At commercial banks, that gap, or spread, runs as high as 5 percentage
points. In recent years, a new breed of electronic banks, unburdened by
the costs of branches and tellers, has risen to challenge established banks
by offering cheaper loans and higher yields on certificates of deposit. |
