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The 2 Sectors Driving Growth in Financial Services

Jay Jenkins
June 20, 2013

In the current issue of The Journal of Economic Perspectives, economists present data that shows traditional consumer banking and asset management were the forces behind outsized growth in the financial sector over the past 30 years. If this trend continues, which financial services companies are best poised to lead the way?

How much has finance grown, really?
The authors of the report, economists Robin Greenwood and David Scharfstein, first point to the U.S. economy's increasing reliance on financial services for growth. In 1950, financial services contributed 2.8% to GDP, compared to 4.9% in 1980 and 8.3% in 2006.

Source: "The Growth of Finance," The Journal of Economic Perspectives.

The primary driver was a dramatic increase in household debt, primarily mortgages, which increased from 48% of GDP in 1980 to 99% in 2007. The run-up before the real estate bubble aside, the more than doubling of household debt in just 27 years is remarkable.

Consumer banking
Wells Fargo (NYSE: WFC) stands apart among the big banks as the premier mortgage lender. Not only is Wells the largest mortgage lender in the country, it also has a proven track record of conservative underwriting through its strong performance through the financial crisis.

Wells continues to maintain market leading credit metrics, including a 4.9% delinquency rate and a 2.14% foreclosure rate as of yearend 2012, besting Citi (NYSE: C), JPMorgan Chase (NYSE: JPM), and Bank of America (NYSE: BAC).


Wells Fargo



Bank of America

Delinquency Rate





Foreclosure Rate





Wells ended Q1 with a pipeline of $74 billion in mortgage loans, after originating $109 billion in the quarter -- its sixth consecutive quarter of $100-billion-plus originations.

Asset management
The increase in asset management, according to Greenwood and Scharfstein, is primarily driven by an increase in the value of equities already under management. This means that growth was not driven by new inflows of money into the asset management firms; instead, industry growth was driven by strong performance in the stock markets.

BlackRock (NYSE: BLK) is far and away the largest money manager with over $3.6 trillion in assets under management (AUM). The company saw quarterly earnings per share increase 16% year over year in Q1, as AUM increased nearly 9%. In line with the thesis laid out by Greenwood and Scharfstein, 98% of the company's increase in AUM, $279 billion, was driven by market gains.

BlackRock reported that 55% of its assets under management were tied to equity holdings, generating 56% of base fees. Based on the data from Greenwood and Scharfstein, we would expect BlackRock's fundamenta