Investment banks look overseas for profit growth
Stock markets from Hong Kong to Paris have outpaced the U.S.
NEW YORK » Facing a U.S. economy that's expected to grow at a moderating pace in 2007, Wall Street's biggest investment houses are aggressively turning overseas in hopes of sustaining record profits reached during the past year.
Economic and business growth surged in Europe and Asia in 2006, and that trend is projected to continue this year. Stock markets from Paris to Hong Kong have outpaced the gains produced on U.S. exchanges, and foreign companies are increasingly using acquisitions to grow.
This has motivated the major New York-based investment banks to expand their operations in global financial centers including London, Frankfurt, Sydney and Hong Kong. Without plans to increase their business outside the U.S. -- either through organic growth or acquisitions -- executives said their companies would fall desperately behind.
"As a general matter, there are more opportunities to grow outside the U.S.," said Merrill Lynch Chief Financial Officer Jeff Edwards. "We will look for places where an acquisition can accelerate a growth opportunity, but we will remain disciplined."
Edwards said 37 percent of Merrill's $34.7 billion in 2006 revenue came from overseas operations. Last year showed continued outperformance from outside the U.S., with Europe and Asia setting new full-year records for both revenue and earnings. And he expects this trend to continue.
The story at Merrill Lynch's four biggest rivals is the same.
Goldman Sachs Group Inc. has long been considered the most European of the U.S. investment banks. In 2006, the company reported a record $37.7 billion of revenue, and 45 percent of that came from overseas.
A spokesman for the company said overseas operations have long been a focus for growth, but that it will use internal expansion rather than acquisitions to grow.
Bear Stearns Cos. reported $9.23 billion of revenue in 2006, and about 14 percent came from overseas.
Of all the Wall Street houses, Bear Stearns had the lowest portion of its business coming from outside the U.S. But that's about to change.
The company has long based its European business out of a few floors in a London office building.
In August, Bear Stearns signed a contract to move into a new, 12-story building based in Canary Wharf.
It's more than just new digs, said Bear Stearns European Chairman Michael Peretie in a statement: "This building represents a new milestone in the development of Bear Stearns' franchise in Europe and confirms our commitment to the region."
Lehman Brothers Holdings Inc. reported that 37 percent of its $17.6 billion of revenue was from overseas operations.
Just this past week, the company made a big move to boost its Asia-Pacific expansion strategy by acquiring closely held Grange Securities in Australia.
Morgan Stanley won't provide a breakout of its 2006 revenue until it files its annual report with the Securities and Exchange Commission, which is expected in February.
However, in 2005, the company derived about 29 percent of its revenue from overseas.
Beyond its Asia and European operations, Morgan Stanley has taken a keen interest in expanding in the Middle East as well. The company on Wednesday said it would form a joint venture with Capital Group, a securities firm based in Riyadh, Saudi Arabia.
"The markets in the U.S. aren't growing like they used to, and we've seen the potential of equity markets pretty much tapped out," said David Easthope, an analyst with business consulting firm Celent. "These banks are simply going where there's growth."
In Europe, that growth is being spurred in a number of areas. The conversion of the continent to the euro has certainly made cross-border merger and acquisition deals easier.
Trading in equities and derivatives has also picked up as stock exchanges become more pan-European.
Developing economies in Asia, such as China or India, have also been a source of income for U.S. banks.
These countries have previously been difficult to crack because of regulatory laws that restrict investments by foreign companies. Those laws are changing, and the Asia-Pacific region has the fastest growth rate in the world.
Expanding internationally isn't only for the big banks, either. Discount brokerages like E-Trade Holdings Inc. also plan global growth to access new markets -- and even offer U.S. customers the ability to trade foreign stocks.
"International is a key component of our strategy," said Jarrett Lilien, E-Trade's president and chief operating officer, who added that the company would like do so through spot acquisitions.
"The growth overseas on the retail side is far outpacing the U.S., and this year we want to expand our geographic footprint and develop new products," he said. "We want to use this infrastructure to give our U.S. customers a shot at trading internationally."