Bank of America Corp chief executive officer Kenneth Lewis said some securities firms are unlikely to remain independent because they lack the capital to contend with commercial banks like his.
"The banks just have so much capital and so many resources I think it is going to be harder and harder for [investment banks] to compete," Lewis told investors and analysts on Tuesday on a conference call sponsored by Prudential Securities Inc. "I don't see how the investment banks will be able to continue to compete on a stand-alone basis."
Investment banks including Morgan Stanley are losing market share to rivals such as Bank of America, the third-largest US bank by assets. Commercial banks are using their lending to boost fees from stock and bond underwriting.
Bank of America's assets total US$660 billion, more than any securities firm. Citigroup Inc, the world's biggest financial services company, has US$1.1 trillion of assets. J.P. Morgan Chase & Co has US$759 billion of assets. Morgan Stanley's assets total US$529 billion and Merrill Lynch & Co's US$448 billion.
Commercial banks that combine lending with stock and bond underwriting and merger advice are taking a bigger share of investment banking, according to Freeman & Co, a Wall Street consulting firm.
Last year, the banks as a group received about 59 percent of the fees paid, 4.5 percentage points more than in 2001.
Securities firms' reliance on stock and bond markets "is not a very good public company business model because it is so volatile," Lewis said.
Connecting commercial lending and investment banking has forced the three biggest banks by assets, Citigroup Inc, J.P. Morgan Chase & Co and Bank of America, to write off billions in bad loans to companies including Enron Corp and WorldCom Inc.
"You look at the troubles caused by the WorldComs out there, and you see that the multipurpose business model hasn't proven that it's going to be successful," said Roy Smith, a former Goldman Sachs partner who is now a professor of investment banking at New York University's business school.
"There is a struggle going on, but it hasn't been resolved yet," he said.
Bank of America's success at adding investment-banking business will depend on its ability to hire more bankers and boost its reputation among companies that previously have hired underwriters such as Goldman, Morgan Stanley and Merrill Lynch & Co, Berman said.
"Those banks have smart people with innovative ideas," he said. "It is about intellectual capital."
Bank of America Securities has hired more than 20 investment bankers this year from rivals including Goldman in McClelland's strategy to boost talent amid the firing of 80,400 securities industry employees since April 2001.
"The focus has clearly been hiring people that would add to our capabilities as opposed to overpaying for some investment bank," Lewis told investors.