BISA Quarterly Productivity & Performance Report

Bank B/Ds Rebound in 1st Quarter

Bank broker/dealers stared the year with improved sales force productivity and higher revenue, reversing the deteriorating revenue they experienced last year. The first quarter of 2003 ended with higher revenue from virtually all product lines and a new high water mark in profit contribution.

Broker Productivity. The typical full-time Series 7 retail investment sales representative working in a bank generated gross commission revenues of $23,763 per month during the first quarter of 2003, up slightly from the previous quarter and arresting a slide from the all time quarterly high of $31,209 recorded in the first quarter two years ago. The average monthly broker productivity was just 6 percent below the first quarter last year but 24 percent short of the all-time high two years ago.

The average monthly gross of bank brokers was $23,098 in January, down 5 percent from December, before sliding another 2 percent to $22,670 in February. But in March, broker productivity jumped 13 percent to $25,520, the highest level since last August.

Licensed banker productivity recovered after falling for three consecutive quarters from the record pace of the first quarter last year. The typical licensed branch banker generated monthly gross commission revenue of $2,392 during the first quarter, up 28 percent from the previous quarter but still 13 percent below the high water mark a year ago.

The average monthly gross of licensed bankers set a new monthly record of $2,980 in April, but then slipped all the way down to $1,437 in November, the lowest level since November of 2000. Licensed banker productivity surged 73 percent in December, boosted by some year-end bonus interest specials, only to slip back 9 percent in January. Banker investment sales productivity was flat in February, but increased 15 percent in March.

Revenue Mix. While the safe harbor of fixed annuities continues to capture the lion’s share of bank broker/dealer sales revenue, fixed annuities accounted for a smaller share of bank B/D revenue for the third straight quarter. General securities business continued to capture a larger share of bank brokerage business, while mutual funds once again account for the smallest share of revenue since the BISA began monitoring bank brokerage performance.

Fixed Annuities. Fixed annuities had accounted for over half of bank B/D revenue from June 2001 until September 2002, reaching 59 percent of monthly revenue in the typical bank broker/dealer in January 2002 and again in April. But the share of revenue derived from fixed annuities slipped to 47 percent in October and 44 percent in November, before recovering to 49 percent in December. Fixed annuities were down to 43 percent of revenue this January and 38 percent in February, before improving to 41 percent in March. The share of total bank retail securities revenue coming from fixed annuities has now declined in three consecutive quarters, after increasing in eleven of the previous fifteen quarters. Nonetheless, fixed annuities contributed 41 percent of the typical bank B/D’s revenue in the first quarter, compared to only 18 percent in the second quarter of 1999.

Variable Annuities. Variable annuities accounted for 17 percent of bank securities program revenue in the fourth quarter, the same percentage as the previous two quarters, but 4 percentage points better than the first quarter a year ago. For the third consecutive quarter VA revenue exceeded mutual fund revenue in the typical bank brokerage.

Mutual Funds. Revenue from mutual fund sales remained at the historical low of only 12 percent of total bank broker/dealer revenue in the first quarter, matching the previous two quarters and the fourth quarter in 2001. Mutual fund sales revenue was 19 percent of average bank brokerage revenue in the second quarter of 2001 and 32 percent in the first quarter three years ago.

Stocks & Bonds. The share of bank broker/dealer revenue from general securities transactions expanded from 8 percent to 10 percent during the fourth quarter last year, and another 8 percentage points to 18 percent in the first quarter this year.. During the third quarter of 1998 individual equity and fixed income business accounted for 19 percent of bank retail investment services revenue, but declined precipitously in importance after the market volatility during the fourth quarter that year. The revenue share of stock and bond transactions recovered during 2000, fell again during 2001 but improved slowly during 2002 before jumping in the first quarter this year. The general securities business contributed11 percentage points more of bank B/D revenue in the first quarter than a year ago.

Life Insurance. Life insurance accounted for 1.7 percent of bank brokerage revenue in the fourth quarter. The BISA Quarterly Report started breaking out life insurance sales from other miscellaneous sources of revenue in the third quarter last year.

Other Revenue. Other sources of revenue such as trading profits, interest income, investment advisory (wrap) accounts, trailer commissions, marketing allowances, etc., provided 10 percent of revenue. Revenue from fee business amounted to 8 percent of the other revenue, or 0.8 percent of total bank brokerage revenue.

Revenue Penetration of Deposits. The average bank retail securities program participating in the Kehrer-AXA Distributors Monthly Monitor had annualized revenue of $2,462 per million in bank retail deposits in the first quarter of 2003, up 23 percent from the previous quarter and 13 percent above the first quarter of 2002. Monthly revenue per million of bank retail deposits has expanded for six consecutive months, rising from $143 per million in September to $158 in October, $169 in November, $175 in December, $195 in January, $198 in February, and $222 in March, an improvement of 55 percent over the past two quarters.

Revenue penetration of deposits measures the amount of revenue from mutual funds, annuities, life insurance, fee business, and securities brokerage activities the bank achieves, relative to the size of the retail bank. This measure provides an index of same-bank sales over time.

Deposit Penetration by Product Line. Revenue from all sources except life insurance increased during the quarter, but the general securities business led the way, exploding 124 percent.

Fixed annuity revenue averaged an annualized rate of $1,001 per million of retail deposits during the first quarter, up 7 percent from the previous quarter but 19 percent below the first quarter a year ago and 22 percent below the record high of $1,280 set in the second quarter. Still the average bank produced $2.32 in fixed annuity revenue for every dollar of VA, and fixed annuity revenue was 37 percent greater than the revenue from mutual fund and variable annuity sales, combined.

Variable annuity sales revenue was up 24 percent during the first quarter to an annualized rate of $431 per million of bank retail deposits, 50 percent better than a year ago. For the third consecutive quarter Bank B/Ds produced more VA revenue than mutual fund revenue, earning 44 percent more revenue from VAs. Variable annuity sales have held up better than mutual funds in banks during this difficult bear market. Individuals who invest where they bank have been buying an increasing amount of mutual funds inside variable annuities, attracted to the downside risk protection and extra deposit credits built into the newer VA products.

Revenue from mutual fund sales increased for only the fourth time in the last 17 quarters, and was back up to the level of the first quarter last year. On an annualized basis, mutual fund sales revenue in the first quarter was $300 per million of bank retail deposits, 29 percent better than the previous quarter. According to the Investment Company Institute, US new sales of long term mutual funds were down 1.2 percent from the fourth quarter, so once again mutual fund sales held up better in banks than in other channels.

The general securities business in bank broker/dealers jumped 124 percent in the first quarter after expanding 14 percent during the fourth quarter. Annualized stock and bond revenue penetration of deposits was $435 per million, 186 percent above a year ago.

Life insurance sales revenue in the brokerage unit was only $19 per million of bank retail deposits on an annualized basis, off 39 percent from the previous quarter.

Revenue from other investment services activities was $276 per million of bank retail deposits on an annualized basis during the quarter, up 4 percent from the fourth quarter and 6 percent over the first quarter a year ago. Other income includes trailer fees, trading profits, interest income, marketing allowances, and fee-based business.

Profit Margin. Participating retail securities programs report that contribution to net income (before corporate overhead allocation and taxes) averaged 35 percent of bank broker/dealer revenue in the first quarter, the same as the previous quarter. Nevertheless, the profit margin in the typical bank brokerage is still 4 percentage points below the level of a year ago, when a larger share of bank brokerage sales were in higher margin fixed annuities.

Deposit Profit Penetration. For a bank, a better measure of profitability than profit margin is how much net income the bank's retail securities program achieves relative to the size of the retail bank. Deposit profit penetration measures the amount of net income from retail securities sales per million in bank retail deposits.

Annualized profit penetration was $1,178 per million of retail deposits during the first quarter, up 19 percent from the previous quarter after improving 14 percent during the fourth quarter. For the second consecutive quarter the banks able to report expenses on a monthly basis registered a new high in profit contribution.

About The BISA Quarterly Productivity & Performance Report. The Productivity & Performance Report is provided each quarter to members of the Bank Insurance and Securities Association to monitor industry trends. The report is prepared by Kenneth Kehrer Associates, and is based on Dr. Kehrer’s Monthly Bank Investment Services Monitor, which is sponsored by AXA Distributors.

Kenneth Kehrer Associates is an independent consulting firm based in Princeton, NJ. Dr. Kehrer conducts research that bench marks the performance of bank retail securities and insurance programs, analyzes compensation structures, and seeks to identify best industry practices. He also consults for banks and product providers on improving bank distribution of investments and insurance, and moderates bank roundtable study groups on issues facing bank broker/dealers. Additional information about this and other benchmarking studies can be found at www.kenkehrer.com.