Though there are always headwinds, broker-dealers and other financial firms are poised for a strong year ahead, according to several equity analysts.
Ongoing regulatory issues and a flattening yield curve may threaten the sunny scenario for 2018, but overall rising interest rates, increasing asset values and robust capital market conditions should continue to support broker-dealers with a focus on both investors and dealmaking, they say.
As was true in 2017, scale, diversification and technology likely will be "the keys to success for firms in the space given the ever-changing and challenging competitive landscape, increasing costs of regulation and exposure to market cycles," says Ann Dai of Keefe, Bruyette & Woods, in a recent report.
M&A Momentum
KBW's Dai says the equity research team will continue to "look for value and catalyst-driven stories" next year "as [valuation] multiples on many of our names began to feel stretched into the latter part of 2017."
The firm has zoomed in on LPL Financial and Piper Jaffray, for instance, mainly due to their dealmaking.
LPL bought the assets of National Planning Holdings, including four broker-dealers with some 3,200 advisors, in August. It also stands to benefit from interest rate sensitivity and tax reforms, Dai points out.
"Accretion from acquisitions announced in 2017 should be additive …, and retention and productivity of NPH assets will be a main point of focus for LPL in the coming quarters," she explained.
For its part, Piper Jaffray is moving toward a business model that depends more on mergers and acquisitions. The firm's shares still trade "at a meaningful discount to the M&A-focused peer group," the CFA notes.
Piper Jaffray is set to have a new CEO on Jan. 1: Andrew Duff is retiring and will be replaced by Chad Abraham, now co-head of the firm's investment banking and capital markets division. Duff, who has been CEO since 2000, will stay on as chairman. CFO Deb Schoneman will become president.
Other analysts are upbeat on different firms in the financial services field, such as Charles Schwab.
"We see potential for Schwab shares to perform well around the higher interest rate outlook and growing bank assets," said JPMorgan's Kenneth Worthington in a recent note.
"We expect Schwab bank asset growth to increase substantially with faster and larger transfers from money market fund assets to bank assets," he explained.
