Rebound depends on interest rates BROKERAGE FIRMS

January 01, 1995|By David Conn | David Conn,Sun Staff Writer

Those divining the fortunes of the securities industry in 1995 are honing in on a set of key factors. The top three, in order of importance, are: interest rates, interest rates, and interest rates.

It was interest rates, or their sharp turnaround last year, that cut the legs from under a three-year record run of earnings for securities firms. Pretax profits for New York Stock Exchange member firms that do business with the public dropped from $6.6 billion in the first nine months of 1993, to $1.4 billion in the same period last year.

Last year "started out all right, and beginning Feb. 5 things went downhill very quickly for the industry," said Michael A. Flanagan, a securities industry analyst with Lipper Analytical Services Inc., in New York.

He was referring to the date the Federal Reserve Board first raised short-term rates last year, driving the Dow Jones industrial average down 96 points the same day. From then on, it was one tough market as the Fed continued to raise rates, culminating in its sixth move, a three-quarter-point jump in November.

"The industry's health in 1995 continues to be very much dependent on interest rates," Mr. Flanagan said.

But his prediction for this year is modest improvement over 1994. One reason: The industry probably won't suffer a quarter of trading losses, like the second quarter of last year when securities firms lost $600 million.

Also, the higher rates, while reducing the appeal of stocks, will draw more investors to fixed-income securities, which will raise trading revenues in that segment.

"Assuming that interest rates continue moving up, I think the securities industry is going to have a tough time next year," said Perrin H. Long Jr. of Connecticut, an independent analyst of the securities industry.

Firms that depend on investment banking business, such as Alex. Brown Inc., saw revenues from that business fall off dramatically last year. Revenues in the first nine months of the year fell to $4.7 billion from $7.3 billion a year earlier.

Mr. Long suggested that despite the tough conditions, Legg Mason Inc. likely will report higher earnings in the next fiscal year after this one, the one that ends in March 1996. That's because of its acquisition late last year of Boston-based Batterymarch, a money manager with a large presence in international investments.

James Riepe, a T. Rowe Price Associates Inc. managing director who runs the company's mutual funds division, said his industry will continue to grow this year, but at a reduced rate.

Lower returns in the bond market slowed cash inflows to fixed-income funds throughout much of last year at Price, Mr. Riepe said.

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