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Here Comes The Earnings Rebound

by Eric Daugherty

BlackRock's earnings are a sign of what is to come. While we might not be back where we started in the market or with investors trusting the industry, we are close to claiming a return to healthy industry profitability.

kasina looks at industry profitability quarterly, using data available from the publicly traded asset managers, and triangulating with news and other insights. Starting in the second quarter, things began looking better for the industry.

That earnings started to rebound in Q2, 2009 is no surprise. In our industry, earnings are a function of assets under management and cost structures. While we took huge earnings hits in Q4, 2008 and Q1, 2009, companies responded by cutting their cost structures, with roughly a one quarter lag to the market turmoil. By the April/May timeframe, most of the cost cutting had been done - right in time for a healthy market rebound.

We anticipate that the drag of 1Q and 2Q, 2009 will still leave full-year 2009 average margins at about 27-28%, shy of 2008 (29.7%). The good news is that the industry is prepared to capitalize on the market rebound and skinnier cost structures and have robust earnings in 3Q and 4Q that are equal to or better than they were prior to the market meltdown. We anticipate 3Q operating margins averaging 31-32% and net margins of 22%, both numbers better than full-year 2008 margins.

With healthier balance sheets and P&L's we anticipate that firms will return to a focus on growth opportunities, particularly M&A and selective product innovation. It is a bit premature to declare that we are out of the woods. Certainly we need to learn lessons from the recent turmoil, there is still downside risk in the market, and there are challenges to regaining public and investor trust. However, it does appear that industry profitability is back on solid footing.