BY URSULA MILLER
The Cincinnati Enquirer
A kiosk promotes Provident Bank's brokerage services at the East Fourth Street branch.
(Glenn Hartong photo)
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Fifth Third Bancorp's acquisition last week of the Ohio Co. underscores a hot trend among regional banks trying -- like their national counterparts -- to bolster their stock brokerage and underwriting businesses
"It's a similar thing on a smaller scale," Greg Johnson, an editor at the research firm SNL Securities in Charlottesville, Va., said. "The smaller banks are trying to act like big banks." Whether buying brokerage business from existing franchises at today's high prices proves a successful formula for national or regional banks is unclear.
"It's too early to judge," Mr. Johnson said.
So far, though, reality hasn't kept pace with the lofty expectations that banks came into the brokerage business with in the mid-1980s. At the time, banks estimated their brokerage units would eventually contribute 20 percent to 25 percent of their parents' bottom lines. By 1996, their contribution to banks' earnings averaged 4 percent and only 1 percent at so-called super-regional banking companies, according to Kenneth Kehrer Associates in Princeton, N.J.
But the flood of brokerage acquisitions in the last year also underscores that profit-conscious banks are committed and patient. It's easier, as well, for banks to exploit brokerage opportunities in the late 1990s as Depression-era laws designed to separate commercial and investment banking have all but withered away.
All three of Cincinnati's home-grown banking companies are trying to expand their brokerage businesses, though each is taking a different tack in their efforts to be all things financial to a wider variety of customers.
Fifth Third is the most acquisitive of the three. Provident Financial Group Inc. has been the most flashy in terms of advertising its efforts. Star Banc Corp., meanwhile, has taken a more quiet, cautious approach.
Jackie Wilson, a 5/3 consultant, talks to Emiel Demessemaekers, an assistant director for P&G.
(Saed Hindash photo)
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In some ways, the brokerage business is old hat for Fifth Third. The largest and most dominant of Cincinnati's three hometown banks, Fifth Third had an active brokerage subsidiary in the 1920s.
Fifth Third, along with most commercial banks in the early 1930s, got out of the securities business after the Glass-Steagall Act was passed. Under the law, commercial banks could receive no more than 10 percent of their revenue from the brokerage business, a limit so slim that most simply abandoned business on Wall Street.
Glass-Steagall, named after Sen. Carter Glass, a Virginia Democrat, and Rep. Henry Bascom Steagall, an Alabama Democrat, was meant to make banks safer by curbing their omnipotent financial powers and restore the public's lost faith in the banking and securities industries in the wake of the 1929 market crash and Great Depression. Further, the Bank Holding Company Act of 1956 placed restrictions on what banks could do in the insurance industry, namely policy underwriting.
But in the last 15 years, the wall between the three businesses has crumbled as regulators have bowed to market forces. Banks have pushed for the freedom to create so-called financial services supermarkets as a way of providing customers one-stop shopping -- and to boost their fee income from high-margin businesses.
To that end, banks have been busy diversifying their product offerings through acquisitions of all types of non-traditional banking businesses, from consumer lending and mortgage companies to credit card providers.
Brokerages, as well as investment advisory and money-management firms, are simply their latest conquestspurred by the long-running bull market and correspondingly strong consumer demand for stocks, bonds and mutual funds.
Banks have increasingly expanded their brokerage business with the blessing of their most influential regulator, the Federal Reserve Board.
Perhaps the most visible sign of the changing tide came in 1992, when banks got the regulatory go-ahead to offer stock mutual funds. The floodgates for banks opened a couple of years agowhen regulators said bank-holding companies could cull up to 25 percent of their total revenue from brokerage activities, up from the 10 percent established by Glass-Steagall.
Brokerages, by contrast, have been given permission to add relatively few traditional bank products.
Many of the major brokerage wire houses and well-known regional shops have been bought by banks in the last year and a half.
The proposed $70 billion marriage of Citicorp and Travelers Group, announced in April, stands as the most poignant example of banks' efforts to get back into the securities and insurance businesses. The combined company, to be called Citigroup, could offer banking through Citibank, insurance through Travelers and Primerica and brokerage and investment banking through Salomon - Smith Barney.
Banc One Corp. in Columbus was an early leader among super-regional banks looking to expand its brokerage business, albeit with decidedly mixed results.
Differing strategies adopted
Fifth Third, Provident and Star, meanwhile, have become much more active in the last couple of years. The success of each bank's proprietary mutual fund family has given each a viable product to peddle to retail customers.
Provident and Fifth Third dipped their toes in the brokerage business more than a decade ago. Provident launched Provident Securities Inc. -- PSI, for short -- in May 1984. Fifth Third re-created its Fifth Third Securities brokerage subsidiary in November 1985.
Provident started from scratch with PSI. Its one-person sales staff has grown to 22 registered representatives today, with a 50 percent increase in brokers in the last year alone. PSI's signature mark is a prominent storefront location on Fourth Street next its parent company's headquarters tower.
Provident opened its first brokerage-only location, recognized by passers-by for its electronic ticker of the Dow Jones Industrial Average, in June 1996. It has a second brokerage-only location in Dayton, Ohio.
Fifth Third opened its first storefront brokerage-only location on Fountain Square, also adjacent to its parent's headquarters, in 1992.
The Ohio Co. is Fifth Third's most important acquisition in the brokerage business, but it isn't the first. C.H. Reiter, an old-line, family-run brokerage acquired in the mid-'80s in downtown Cincinnati, was.
"We could do it on our own or buy an entity that was already up and running," said Peter Bielan, vice president of manager of Fifth Third Securities. "(Reiter) gave us the securities licenses that were required to operate a brokerage firm. From a financial and expediency standpoint, that was the best way to do it at the time."
Fifth Third's hunger for acquisitions has increased in recent months. Its buyout of privately held Ohio Co., a stock deal estimated at $80 million to $85 million, is the latest of sevenbank or finance-related acquisitions by Fifth Third since early 1997.
The Ohio Co., based in Columbus, gives Fifth Third a foray into Michigan, bolsters its assets under management by $2 billion and quintuples the bank's army of brokers to 250 from 50.
Perhaps most important, Ohio Co. allows Fifth Third to enter the stock and bond underwriting business.
"We weren't able to do that before," Mr. Bielan said.
The majority of Ohio Co.'s 48 offices will remain brokerage-only shops -- for the time being, Mr. Bielan said. But the signs on the Ohio Co. offices will be replaced with Fifth Third - The Ohio Co., rather than Fifth Third Securities - The Ohio Co.
The signs might well leave customers uncertain as to whether the offices serve bank or brokerage customers -- or both. Mr. Bielan didn't offer an explanation, except to say the signs will be consistent for all Ohio Co. shops.He added that all of the Ohio Co. offices are leased, in contrast to Fifth Third's, which are all owned.
Analysts say storefront locations like Fifth Third's and Provident's are important marketing tools for newcomers in the brokerage business because they help consumers get a better grasp on the service. Well-known, full-service brokerage wire houses like Merrill Lynch, for example, often locate on the upper floors of office towers.
Star's setup
Star, in contrast to Fifth Third and Provident, has no brokerage subsidiary. It sells a full array of brokerage products, though, through a third-party provider.
Star's 40 Investar representatives actually work for a brokerage based in Carmel, Ind. MDS Securities, which does business as Bank Mark, is a subsidiary of Conseco Inc., one of the nation's biggest insurance companies.
Star shares in the profit with its brokerage partner but incurs none of the cost of running the business, said Richard Davis, Star's executive vice president in charge of consumer banking.
"I'm absolutely sure there will be a time one day to bring it in-house," Mr. Davis said. "When I hit it, I'll know it, but I'm not there."
How smart Star looks for not taking on the expense -- and risk -- of creating a brokerage subsidiary up to this point ultimately will depend on the success of bank brokerages.
"The cautious one may prove to be the wiser," SNL's Mr. Johnson said. "I've been trying to figure out the advantages of owning the subsidiary, vs. teaming up with somebody."
The trade-off for low risk is low return, said John O'Connor, director of research and a senior analyst at Fort Washington Investment Advisors, downtown.
None of the three Cincinnati-based banks will divulge revenue or profit from their brokerage operations, but analysts say Fifth Third, Star and Provident likely fit within the average industry statistics that show brokerages to be a small piece of their parent companies' total business.
