It’s earnings season, and some leading US brokers performed far better this Q2 than they managed last year. However, this is unlikely to make life easier for IT vendors who derive business from Wall Street firms. The profits rise is driven almost entirely by cost cutting, and financial firms will stay extremely cost conscious for the rest of the year.
Brokers such as JP Morgan Chase and Merrill Lynch have reported increased Q2 profits.
Most IT vendors face a tough sales environment; for vendors who sell to firms in the financial markets sector, this reflects the difficulties faced by their clients. So this week’s earnings results from leading brokers might at first sight seem cheering for the sector.
JP Morgan Chase’s Q2 profits were 50% higher (before one-time items) than Q2 last year, although the firm’s EPS of 50 cents were below estimates of 65 cents. The increase in profits was due partly to cost cutting – headcount was reduced by over 1,000 employees – and partly to strong retail banking operations driven by low interest rates. The brokerage and investment banking arms were weak, with profits down 23% and 35% respectively from Q2 2001.
Charles Schwab is still suffering from poor market conditions. Its Q2 earnings of $98 million were below estimates – and were $4 million below last year’s. Schwab attracted 225,000 new customers in Q2, but low trading volume drove revenues down by $160 million from 2001. Schwab has also cut its workforce, axing 20,100 jobs this year, and is looking at additional cost cutting measures.
Merrill Lynch has reported earnings of $634 million, a 17% gain on Q2 last year despite a 16% fall in half-year revenues. Not only has Merrill reduced headcount – total compensation expenses are down 14% – it also has sliced 19% or $700 million off non-compensation expenses. This pattern is typical of firms in the financial markets sector (although Bear Stearns had a profitable quarter thanks to Aeropostale’s IPO).
Most brokers also expect a weak Q3 in revenue terms, indicating that a strong focus on cost containment will characterize their IT spending behavior. New spending will be focused on core necessities and projects with a rapid payback, and times will remain tough for IT vendors.
Related research: Datamonitor, IT in US Insurance (DMTC0843)
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