Financial services is the largest industry (or category of industries) in the world in terms of earnings (20% of market cap in the S&P 500 in 2004). Financial services is a term used to refer to the services provided by the finance industry. Banks, insurance companies, investment banks, and brokerages, are examples of the types of firms forming this industry: They provide money and investment and related services.

USA: Gramm-Leach-Bliley Act

The term financial services became more prevalent in the US partly as a result of the Gramm-Leach-Bliley Act of the late 1990s which enabled different types of companies in the US financial services industry to merge. Critics of this act say the term financial services attempts to make the unison of these operations sound natural, ignoring the possible problems from combining them, such as conflicts of interest and monopolization. Others, noting that many of the restrictions abolished by the Gramm-Leach-Bliley Act had never existed in other countries or had been abolished earlier than in the USA, say the term financial services is a natural one in long term use which means nothing more than its constituent words.

In the USA almost every company now which previously described themselves as a bank, insurance company, or brokerage house, now describes themselves in some way as a financial services institution. Allstate Insurance, for example, now provides CDs and investment brokerage services. Bank of America offers full featured brokerage products, while E-trade has expanded into offering bank accounts and loans. Companies usually have two distinct approaches to this new type of business. One approach would be a bank which simply buys an insurance company or an investment bank; keeps their original brands; and adds it to its holding company simply to diversify its earnings. Outside the United States, for example in Japan, it is also permitted to have non-financial services companies within the holding company. In this scenario, each company still looks independent, and has its own customers, etc. This is essentially the style of Citigroup and JP Morgan Chase.

In the other style, a bank would simply create its own brokerage division or insurance division and attempt to sell those products to its own existing customers, with incentives for combining all things with one company. This is the style of Washington Mutual and Wells Fargo.

Market

Financial services is the largest group of companies in the world in terms of earnings and equity market cap. It is not the largest category in terms of revenue or number of employees. Financial services, while as a whole industry is slow growing, is also extremely fragmented, with the largest company (Citigroup), only having a 3 percent US market share. See page 11, "The Opportunity: Small Global Market Share", of Sanford C. Bernstein & Co. Strategic Decisions Conference - 6/02/04 for the 2003 market shares of Citigroup.

In contrast, the largest home improvement store in the US, Home Depot, has a 30 percent market share, and the largest coffee house Starbucks has a 32 percent market share, etc. Despite this fragmentation, these companies are as a group by far the most profitable in the world, and if any grew to the same market share percentages as any other retail industry, the potential profit would be enormous.

2004

S&P 500 index (500 large american companies) market cap 2004 ([1])

• Financial Services: 20.30%
• (Computer hardware & software: 15.30%) (as comparison to 1999)
• Healthcare: 13.40%
• Industrial Materials: 12.20%
• Hardware (computer hardware): 10.80%
• Consumer Goods: 9.70%
• Consumer Services: 8.80%
• Energy: 6.50%
• Software: 4.50%
• Business Services: 3.90%
• Media: 3.90%

1999

S&P 500 index (500 large american companies) market cap in 1999 ([2])

• Technology (hardware, software): 29.8%
• Financial: 13.1
• Consumer Staples: 11
• Consumer Cyclicals: 9.2
• Healthcare: 9
• Capital Goods: 8.4
• Communication Services: 8
• Energy : 5.5
• Basic Materials: 3.00%
• Utilities: 2.3
• Transportation: 0.7

Industries

"Industries" in the "industry". Product set of financial services firms. The core products are transaction services (customers are consumer and corporate), trading and derivatives (consumer and corporate), debt & equity structuring (structured finance) (corporate), asset management (consumer and corporate), financing (debt & equity) (consumer debt, corporate debt & equity), advisory (on M&A and integrated in other products, for example structured finance and derivatives) (corporate), insurance (consumer and corporate).

Asset Management

Asset managment is the term usually given to describe companies which run mutual funds. The largest are those who provide passive, ETF, or index funds.

• Barclays Global Investors
• Fidelity Investments
• Vanguard
• Capital Group Companies (American Funds)
• Putnam
• Janus
• Merrill Lynch
• MFS
• Prudential
• TIAA-CREF
• State Street Global
• Barclays
• Deutsche Bank
• JP Morgan
• Fleming
• Morgan Stanley
• Northern Trust
• Citigroup

Hedge Fund Managers

• Cargill
• Soros Fund Management
• Mellon Financial Corporation
• Citadel Investment Group
• BlackRock, Inc.
• Pequot Capital Management
• RAB Capital
• UBS Investment Bank
• Andor Capital Management
• Greenlight Capital
• Mizuho Holdings

Commercial banks

A commercial bank is what is normally considered a "bank". The term "commercial" is used to distinguish it from an "investment bank", which is an entity which instead of lending money directly to a business helps that business raise money from others in the form of bonds (debt) or stock (equity)

• Citibank
• Bank of America
• HSBC
• Deutsche Bank
• ANZ Bank
• ABN AMRO
• Bank of New York
• Royal Bank of Scotland
• Wells Fargo
• Golden West Financial
• Chinatrust Commercial Bank, incorporated in Taipei, Taiwan
• Bank of China
• Washington Mutual
• Wachovia Corporation
• Fifth Third Bank
• BB&T Corporation
• National City Corporation
• U.S. Bancorp
• PNC Financial Services
• SunTrust Banks
• Regions Financial
• AEGON N.V.
• BNP Paribas
• National Australia Bank
• Commonwealth Bank of Australia
• Toronto-Dominion Bank
• Royal Bank of Canada
• Bank of Montreal
• Canadian Imperial Bank of Commerce (CIBC)
• Bank of Nova Scotia
• National Bank of Canada
• IGM Financial
• Credit Suisse
• Banco Santander Central Hispano
• Grupo Financiero Banamex
• Grupo Financiero BBVA Bancomer
• Banco do Brasil
• Standard Chartered
• Credicorp Ltd.
• Banco Santander Santiago
• Banco Bradesco
• Carlisle Holdings Limited

Private bank

The term private bank is simply a marketing term for a bank or a division of a financial services company targetted towards wealthy individuals. Often it is used to describe specifically the lending services targetted towards this group, such as large margin loans.

Insurance Brokerage

Insurance Brokers shop for insurance (generally corporate property and casualty insurance) for customers.

• Aon
• Marsh
• Wells Fargo
• Wachovia
• Willis

Insurance Underwriting

These companies actually underwrite insurance, which is often sold through agents, insurance brokers, and stock brokers. Activities include insurance and annuities. Life insurance, retirement insurance, health insurance, property & casualty insurance.

• AIG
• AXA
• Allstate
• Geico
• Zurich Financial Services
• Allianz
• Scor
• Chubb Corporation
• CGNU
• Berkshire Hathaway
• MetLife

Reinsurance

Reinsurance is insurance sold to insurance companies to protect them from mega catastrophic losses.

• Swiss Re
• Munich Re
• Lloyd's of London
• Berkshire Hathaway

Investment Banks

Investment banks (capital market banks) underwrite debt and equity. Assist on company deals (advisory services, underwriting and advisory fees). Structure debt in to structured finance products.

• Goldman Sachs
• Lehman Brothers
• Bear Stearns
• Morgan Stanley
• Credit Suisse First Boston
• Lazard
• Nomura
• UBS
• JPMorgan Chase
• ING

see also: Mergers & acquisitions see also: Underwriting

Stock Brokers (private client services) and Discount Brokers

These companies assist people in investing, online only companies are called "discount brokerages", companies with a branch presence are called "full service brokerages" or "private client services".

• Merrill Lynch
• Morgan Stanley
• Smith Barney
• Charles Schwab
• E-Trade
• Ameritrade
• Edward Jones

Cards Issuers

Credit and debit cards ("bank cards"). Citigroup is the largest issuer with 150 million cards at the end of 2004.

• American Express
• MBNA
• Capital One

Credit Card machine services and networks

Companies which provide credit card machine and payment networks call themselves "merchant card providers".

• US Bank
• First Data

Custody services

Custody services and securities processing is a kind of "back-office" administration for financial services. Assets under custody in the world was estimated to $65 trillion at the end of 2004 ([3], [4]).

• Bank of New York
• JP Morgan Chase
• State Street
• Mellon

Miscellanious

• General Electric (GE is one of the largest financial companies)

Brand equity

Each year, BusinessWeek publishes its 100 Best Global Brands study, ranking the financial value of brands. Following are the financial services companies in this list, ranked by this study for 2005.

Glossary

Glossary for reading financial services reports

• Asset sensitive - A financial institution that has a negative duration of equity may also be described as having a positive gap or as being asset sensitive. (American Banker Magazine glossary)
• Liability sensitive - The inverse of asset sensitive.
• Charge-offs - written off debt.
• Cost of funds - the cost of loan capital, the cost of funding assets. The best things in life are free, the same goes for liabilites, free liabilities include interest free checking accounts.
• Negative operating leverage - simply strength of earnings, the formula is sometimes the operating income as a percentage of gross income which measures how large or small the fixed costs are.

Acronyms

• NCL - net credit losses - cost of charge-offs, written off debt ([5])
• NCL rate - net credit loss rate - the percentage of the lending portfolio that is not expected to be repaid ([6])
• NII - net interest income - interest income less interest cost
• NIM - net interest margin - margin between interest income and interest cost
• NPA - non performing assets - interest bearing assets not paying interest

See also

• Government sponsored enterprise
• Thomson Financial League Tables

External link

• The Industry Handbook - Banking