The Financial Services Blog

The list of financial services companies that are being sued as a result of the problems in the US sub prime mortgage market and the following credit crisis is very long.

Famous names such as Merrill Lynch, Countrywide and Citigroup are facing lawsuits brought by investors.  Individual shareholders and even cities are suing other companies in the fall out from past lending practices.  According to the Economist the number of law suits doubled in 2007 compared to 2006.

The bulk of this litigation is taking place in the US and although there have been some high profile cases in Europe such as Barclays suing Bear Stearns and HSH Nordsbank suing UBS it seems unlikely that the same volume of lawsuits will occur in Europe.

These financial services companies will have to undertake extensive searches of all their paper and electronic records as part of the litigation process.  For many years Xerox has been helping companies facing litigation to address the difficult, time consuming and expensive business of document discovery.  As more law suits are filed in the coming months this is going to be a necessary evil at an increasing number of companies.

What will the fed do next week when they meet to discuss interest rates?  The market is expecting a quarter point cut, or maybe even a second half point cut in the federal funds rate.  The housing market remains bleak and today another large decline in sales of existing homes was reported.  Today Merrill Lynch added to the bad news, reporting a third quarter loss due to write downs of nearly $8 billion for sub prime mortgages.

Declining sales, both for new and existing homes, and an inventory backlog of over 10 months of sales, mortgage companies are going to be closing fewer loans.  But with a decline in interest rates there may be an opportunity to increase refinancing, especially as many adjustable rate mortgages (ARMs) are about to flip over to high fixed rates.  However loan volumes are bound to be down from the heady days of 2004 and 2005 and this gives the mortgage companies an opportunity to streamline their mortgage origination process and cut costs at the same time.  Cutting out the paper from the mortgage process and switching to a digital loan file will speed things up, but allowing brokers, insurers and investors to have access to the loan file will increase savings and speed up the process even more.  With the recent creation of Xerox Mortgage Services there is now a solution to help mortgage companies to come throuh the current difficult market conditions and prepare for the eventual upswing in mortgage applications. 

Consolidation in the banking industry is a constant theme but I expect to see the pace of mergers and acquisitions increase over the next few months.  Bank of America recently closed on their long planned purchase of La Salle Bank, bought from ABN/AMRO and TD Bank announced their agreement to purchase Commerce Bank just two days ago.

Business Week recently published an article asking the question “Is it Time for a New Corporate Buying Spree?”.  Their conclusion is that to maintain revenue growth many companies will be forced to make acquisitions as organic growth rates decline.  In the banking industry I expect this to be the case as there are many pressures building on them.  Share prices in the financial segment have trailed the market, profits have been hit by the summer’s credit crunch and the relative weakness of the dollar makes US banks vulnerable to takeover by foreign institutions. 

Pressure to reduce costs in order to help boost profits will encourage the banks to look to their IT services providers and partners to help them uncover and eliminate hidden costs.

This week several banks have reported, or warned that they will report, a severe profit hit resulting from the credit crunch in August.  Citigroup and UBS have announced significant profit falls and Deutsche Bank is expected to join them, see this article in the New York Times for more details.  As a result the banks will concentrate even more on cost reduction and growth strategies.  In particular I expect there will be an increase in consolidation in the industry as share prices for financial stocks stagnate, resulting in bargain prices for buyers.

Cost reduction which is always important to the banks will be even more vital and any partner or vendor that can help in this area will be listened to by the banks.