Banking on diversification: from investment banks to insurers, B.E. financial services companies are discovering that they must diversify to achieve the competitive edge - B.E. Financial Services Overview - Industry Overview

Black Enterprise, June, 2002 by Jeffrey McKinney

Over the last few months, Christopher J. Williams has been accumulating a great deal of frequent flier miles. Dealing with events ranging from recession to terrorist attacks, the CEO of The Williams Capital Group (No. 1 on the BE INVESTMENT BANKS list with $196.2 billion in total issues) and his staff have been hitting the road more than ever to provide personalized service to clients and to calm jittery institutional and individual investors. At the same time, Williams tends to customer needs, leveraging relationships for future deals and making diversification maneuvers such as the recent launch of an asset management unit expected to contribute as much as 30% of the firm's future revenues. "All these events have raised investor concern, created credit quality problems, and caused fewer companies to come to market for financing," Williams says. "When things are in turmoil like this, we try harder to better serve clients and extract a diminishing pool of new business opportunities."

In today's volatile environment, Williams and other CEOs of black-owned financial service concerns--such as investment banks, insurance companies, banks, asset managers, and private equity firms--are facing their toughest challenge yet. Prodded by an unpredictable economy, demanding customers, and rapacious competition, black-owned financial services firms have been forced to diversify operations not only for growth but also for survival. "Business is not failing into people's laps like it was in the late 1990s when things like interest rates were low, the economy brisk, and the stock market strong," says Joe Gladue, an equity analyst and director of market research at The Chapman Co. (No. 8 on the BE INVESTMENT BANKS list with $16.7 billion in total issues). "It's much harder to make profits nowadays than before, and many of these companies are being forced to go after new business or develop alternative ways to generate a new stream of income."

EXPANDING THE CUSTOMER BASE

All is not gloom and doom though. There are great opportunities for many black-owned firms beginning to take advantage of the Financial Modernization Act. That law allows financial service providers to commingle their businesses for the first time, build new customer relationships, and fend off mainstream financial giants like Citigroup and State Farm Insurance and discount retailers such as Wal-Mart stores. It is fitting that BE has unveiled a new list in this bold, new environment--a ranking of the top private equity firms, companies that invest in the next generation of entrepreneurs.

Now African American firms compete with each other as well as mainstream entities trying to tap into a more affluent, sophisticated black consumer market. "You can no longer compete if you don't offer people the products, services, and conveniences they're looking for, particularly with more competition going after the same market," Gladue says.

Still, black-owned banks were able to grow assets and deposits last year fueled, in part, by changes in market conditions. For instance, the Federal Reserve cut the federal funds rate--what banks charge each other for overnight loans--from 6.5% in January 2000 to 1.75% today, the lowest in more than 40 years. That move helped lower borrowing costs for millions of consumers on such items as automobiles and home equity loans.

Although the rate cuts also reduced returns on financial products, many banks were able to increase deposits as more consumers opted for the lower-yielding returns on savings accounts rather than risk losing money in an unstable stock market. In fact, the FDIC found that nearly 50 banks and thrifts owned and controlled by African Americans had assets of about $5.2 billion and deposits of $4.2 billion in 2001, compared with assets of about $4.9 billion and deposits of $3.7 billion in 2000. Asserts Gladue, "The stock market turmoil helped some banks--particularly black-owned and small community banks--gain deposits, even though people got hit with lower returns."

BLACK BANKS MAKE BOLD MOVES

The mandate to boost margins also forced many black-owned institutions to look for new ways to expand profits. Unlike larger majority-owned institutions, many black banks don't have a wide array of fee-based income sources. As a result, they must increase services, broaden their market reach, and make acquisitions to grow.

The nation's largest financial institution on the BE BANKS list, Carver Bancorp, parent company of the Harlem, New York-based Carver Federal Savings Bank, is doing just that. CEO Deborah Wright says the company plans to open more branches, add freestanding ATMs, offer new financial products and services to build account relationships, and collect new fee-based income. The institution, which had $449.5 million in assets last year, recently opened a branch in south central Harlem, the first such act in more than 11 years. It will give Carver access to another 28,000 potential customers and scores of small businesses. Also, the branch will benefit from a $50 million deposit authorized by New York State Comptroller H. Carl McCall, reducing its break-even period by three years. "There's a lot of opportunity there that will take some time to develop," says Wright, "but this gives us great potential to add customers and attract new business."