Fitch: U.S. Securities Firms Will Weather Change in 2004.

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 11, 2003

The 2004 Rating Outlook for U.S. securities firms is Stable, following several years of turmoil, according to an outlook and review of the industry published today by Fitch Ratings. The rating agency has published several

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 11, 2003

The 2004 Rating Outlook for U.S. securities firms is Stable, following several years of turmoil, according to an outlook and review of the industry published today by Fitch

Ratings. The rating agency has published several 2004 outlooks concerning various industries as well as other fixed-income sectors. The Stable Outlook reflects expectations that include ongoing cost flexibility and maintenance of historic leverage levels, as industry conditions appear poised to improve.

Rating issues for 2004 include a) stiff competition from universal banks, b) litigation and arbitration costs and c) pressures for revenue growth and potential impact of increased regulation. Competition across all business lines has resulted in material pressure on earnings and declining fees in most business lines. Investment banking revenues are down due to low volume and competition while weak equity prices and decimalization serve to pressure commissions.

Low merger and acquisition (M&A) volumes since 2000 resulted in firms shifting to trading businesses to stabilize revenues. Record revenues in fixed income departments were posted in 2003 as high levels of corporate and mortgage underwriting were accompanied by a steep yield curve. While the mortgage market will dampen in 2004, we expect growth in the credit derivatives market to result in some stabilization of fixed income revenues. We are not however, projecting a return to strong equity or M&A businesses and therefore project revenues be flat to 2003 levels.

Costs will remain closely monitored although hiring for strategic growth has already been evident in some firms. Technology will remain a focus with firms expected to improve products to provide clients access to systems to further link clients to processes both saving costs and building relationships. Legal costs remain high from ongoing arbitration and litigation issues. Arbitration volumes have not yet peaked and therefore will remain a significant cost for private client businesses in 2004.

Some litigation relief, albeit selective, has been granted as certification standards for class action litigation related to research appear to be high. No class actions related to research conflicts have been certified. In addition, two suits alleging price fixing by the industry were also dismissed. There is certainly high potential for significant judgments, fines or settlements to result from very specific cases including Enron, Worldcom etc. but we are unable to estimate the potential financial impact with reason.