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Ask Richard Sandor or Wendy de Monchaux whether they think Banque Indosuez is a useful addition to Crédit Agricole’s financial fire-power. Their answer might be a short expletive. Both of them quit Indosuez after a brief, but initially successful, attempt to turn the conservative banque d’affaires into an Anglo-Saxon-style derivatives powerhouse. Jean-Claude Gruffat, at that time in charge of Indosuez in New York, hired Sandor and de Monchaux in April 1990 from a defunct Drexel Burnham Lambert, where they had just successfully unwound a $25 billion swap book. Their brief at Indosuez was to develop a derivatives trading operation to expand the bank’s client base and enhance profits. By the end of two years they had done both, although Sandor quit after a year. Indosuez was regarded as the French house in New York for derivatives and structured products, and 1992 trading profits soared to $90 million, according to former members of the swap team. This was done without taking excessive risk. Sandor preferred arbitrage to open-position trading. The team was also active in Paris, London and Hong Kong. But within a year, things began to go wrong on the personal front. Indosuez International Capital Markets, as the group was called, was on a 35% profit share. As profits soared, the French bankers in Paris notably head of capital markets Alain de Korsak began to think the investment bankers were getting too much. They attempted to renegotiate the deal. Sandor quit in early 1991 and de Korsak brought in Luxembourg-born Marc Schmitt from Dresdner Bank as a replacement. De Monchaux refused to report to Schmitt and was finally fired, according to a former colleague, in June 1993. When the bonuses on 1992 profits were announced in February 1993, “15 to 20 traders” were deeply disappointed and walked out. Schmitt and Philippe Gautier brought in from BNP Capital Markets soldiered on for two more years. Derivatives profits in 1993 and 1994 were still respectable but the commitment from above, and possibly the financial incentive, had gone. Indosuez’s foray into front-line financial engineering was in tatters. “We were victims of our own success,” says a former member of the Sandor team. Gautier left in May 1994, and Schmitt a year later. Of the Indosuez swap alumni, Schmitt is at Merrill Lynch, Gautier at brokers Prebon Yamane. De Monchaux took some of her team to Bear Stearns and Sandor runs Centre Financial Products, an insurance derivatives joint venture. Gruffat recalls the decline of Indosuez’s swaps operation as purely a function of credit rating: “We went from AA down to A minus. But the downgrading of our short-term debt by Standard & Poor’s to A2 was the real killer.” Downscaling Since that episode, little has changed at Indosuez to suggest it is any more committed to international capital markets. In fact, the key figure in Indosuez’s plans for expansion in this field, deputy chairman Jean-François Lepetit, left the bank in January. Lepetit had supported Gruffat in New York, the Sandor team and its profit share, but was outmanoeuvred by the man below him, de Korsak. Last year he lost out in his bid, along with then Suez chairman Gérard Worms, to combine Suez with the financial forces of BNP and UAP (Union des Assurances de Paris). Worms was forced out in July 1995. But the last straw for Lepetit came in January, when Indosuez, with the help of consultants McKinsey & Co, announced a downscaling of its global investment banking ambitions. “It was the admission that we can’t be everything to everyone,” says an Indosuez source. “Jean-François [Lepetit] always had an ambition that was perhaps too big for our resources.” Lepetit is now working as an adviser to BNP. Gruffat (the closest Indosuez has to a senior investment banker) has been sent to the vital outpost of south-east Asia. Competitors recognize that Indosuez has a historical franchise, but that operationally it is only good in parts and is riven with internal jealousies. One bank treasurer recalls visits from consecutive Indosuez bankers, each saying: “Don’t tell my colleague that I’ve been here.” Indosuez is the bank the treasurer would like his staff not to emulate. But the curbing of its ambitions may signal a change. Last month, Indosuez confirmed that its strategy, approved by new majority shareholder Crédit Agricole, was to concentrate on Europe and Asia. That includes developing “strong capital markets activities in the Asian Pacific region as well as enhancing our position in core corporate banking,” said Christian Maurin, Lepetit’s replacement as CEO and now chairman. Maurin is a commercial banker, having headed Suez’s consumer finance and credit card subsidiary Banque Sofinco for 10 years. “He’s very French and very domestic,” says a French bank analyst. “He’s not a merchant banker, he’s a civil servant,” says another. For Indosuez, a lot rides on the ability of Gruffat to attract a new team of high-calibre people in Asia. “We’ve been hiring people for debt capital markets,” says Gruffat, “mostly to develop sales and trading in Asian currency bonds.” “Indosuez has always had the ability to attract people,” says a former employee, “but it has lacked the ability to keep them.” If it balks at high incentives and profit-share mechanisms, it will find the job even more difficult. However, with its new parent, Crédit Agricole, Indosuez has a significant new strength a better rating. Rating agencies won’t yet give it the AA+ rating of the mother bank, but IBCA, the London-based rating agency, last month upgraded Indosuez’s medium-term debt from A to AA-. That takes into account the liquid resources likely to be available from the parent and the bank’s reduced cost of funding. It was the deteriorating credit rating of Compagnie de Suez, Indosuez’s former parent, after a downgrade from IBCA last December, which finally forced the sale, according to Suez chairman Gérard Mestrallet. Only last August he had said the bank was an integral part of the Suez group and not for sale. But uncertainty about the bank’s future and its main shareholder ate into client confidence. “At meetings we’d spend the first half hour reassuring the client that we’d still be around in a year’s time,” recalls an Indosuez mandate-hunter. “It didn’t help us win business. But that’s all behind us now.” “We’re already feeling an improvement in our borrowing margins,” says a source at Indosuez’s Hong Kong-based broker WI Carr. An improved rating also makes a bank a more attractive workplace for dealers in derivatives and off-balance-sheet products, because of the activity’s sensitivity to credit. With these enhanced prospects, Indosuez may be steaming ahead in Asia, but Europe is another matter. There is quite an overlap with Crédit Agricole in capital markets and equity brokerage. In the worst case there will be a clash of capital markets philosophy; while in corporate finance and the equity business Indosuez is still weak at home. Indosuez sources recognize that Crédit Agricole has some capital markets expertise, but whether it understands investment banking is still an open question. “All I can say,” says an Indosuez source, “is that they have studied Banque Indosuez as a target for several years. And they were well advised by Goldman Sachs. They went into this with their eyes open.” The Crédit Agricole group comprises a central Caisse Nationale de Crédit Agricole (CNCA) serving 60 caisses regionales. It has 20% of the French retail market. Its wholesale business has grown in response to the needs of the caisses regionales and their huge exposure to interest rate risk as takers of more deposits than they can lend. CNCA has made forays into the corporate lending market, but its corporate lending unit, Unicredit, has been described as a disaster. It has a successful operation in Hong Kong, doing trade finance, and lending to small and medium-sized companies. But this is hardly a base on which to build a global investment bank if that were to be its aim. CNCA had an experience in the swap market similar to that of Indosuez. In July 1990 it hired a team from Elders, which had successfully wound up the Elders swap book after the parent got into financial difficulties. But again the capital markets culture was not easily absorbed. The swap dealers had trouble getting credit lines to expand their business, while they saw billions of francs of exposure being written in traditional loans. According to analysts, in the late 1980s CNCA lost more than Ffr8 billion through aggressive capital markets expansion. Since then CNCA has pulled in its horns but built up useful expertise in its own asset and liability management. Even today, capital markets activity at CNCA makes a small contribution to profits “perhaps 10% in a good year,” says a ratings analyst. “If you want to do something successful with Crédit Agricole,” says a former employee, “do it as a joint venture.” Otherwise, he explains, “the important day-to-day decisions never get made.” One example of this is CNCA’s 50:50 derivatives joint venture with the three Lazard houses Crédit Agricole Lazard Financial Products (CALFP). Based in London, CALFP uses the CNCA balance sheet and Lazard expertise to construct high-margin deals usually in equity derivatives, mostly with Lazard’s top quality clients. The business is successful and profitable but probably adds little to Crédit Agricole’s in-house expertise. CNCA has a number of trading subsidiaries and joint ventures. The Banque de Gestion Privée (BGP), with Ffr700 million ($140 million) in capital and around Ffr10 billion in assets, specializes in asset management and proprietary options trading through its 53% subsidiary Transbourse, on the German, Swiss and French futures exchanges. The Banque de Financement et de Trésorerie (BFT) does much the same but in short-term money markets. BGP takes little credit risk, since it deals mostly in exchange-traded products, not over the counter. It recently sold its leveraged buyout portfolio to CNCA. Insiders say the culture clash already apparent between BGP and CNCA doesn’t bode well for relations with Indosuez. There are two other brokers, Dynabourse, the third biggest in Paris, with a 6.5% to 7% market share, and Hayaux du Tilly, a small retail broker. Dynabourse employs 155 people and has a 100% subsidiary, CA Securities in New York, and an office in Frankfurt. According to outsiders, a lot of its business is with members of the Crédit Agricole group. These subsidiaries are run as separate fiefdoms. Their officers argue that as long as they continue to make a profit there is little reason to integrate them. Crédit Agricole may treat Banque Indosuez in the same way for a while. But once it has completed its consolidated credit and market risk analysis it must report consolidated results and risk positions quarterly under the EU’s capital adequacy directive there will be clear arguments to integrate some activities such as treasury and capital markets. McKinsey & Co, which completed a study on Banque Indosuez in January, is now doing one on the Crédit Agricole group. For the moment, Crédit Agricole management itself does not appear to have a clear vision of where it wants to take the group, judging by its reluctance to talk on the subject. Having made the Indosuez acquisition, it is likely to carry on for a while as if nothing had happened, analysts predict. Stockbroker glut Indosuez staff congratulate themselves that there appears to be so little overlap with Crédit Agricole. In Asia, Indosuez’s strong franchise in equities, foreign exchange and corporate banking impinges little on Crédit Agricole’s business with small and medium-sized clients. In European commercial banking it may be a different story. Both groups have corporate clients, although those of Indosuez are more international, and both compete in the French capital markets in trading and origination. Indosuez owns the biggest stockbroker in France, Cheuvreux de Virieu. Although its clients are more international than those of Dynabourse and Transbourse, there is plenty of overlap. Some analysts have already indicated that it makes sense for Cheuvreux de Virieu to be sold, although insiders say it would be ridiculous to sell the premier stockbroker in Paris. “It’s obvious that five stockbrokers are too many for Crédit Agricole,” says a member of the CNCA group. The fifth, not yet referred to, is Compagnie Parisienne de Réescompte (CPR), 29.5% owned by Banque Indosuez. Although CPR operates independently, Indosuez is the reference shareholder, responsible for CPR’s solvency. But it would be foolish to imagine that the CNCA/Indosuez relationship will progress like the integration of SBC Warburg, ING Barings and Deutsche Morgan Grenfell. CNCA doesn’t necessarily have global ambitions. It has a history of attempting to expand its retail base in France, adding the products of mutual funds, and life and general risk assurance. Its forays into corporate banking and international finance have been tentative add-ons. Nor do the personalities at the top of CNCA and Indosuez convey much commitment to global investment banking. “Thierry Coste [board member responsible for capital markets at CNCA] has a clear vision,” says a former colleague, “but he’s too French.” At Indosuez, former colleagues remember de Korsak having once said: “The French don’t know anything about investment banking, we need Anglo-Saxons.” But most of the Anglo-Saxons have left. The exception is WI Carr, Indosuez’s Asian subsidiary acquired in 1986, which last month won Euromoney awards for best foreign securities firm in Pakistan and Thailand: it is stuffed with Anglo-Saxons. A bid to integrate it more closely with Indosuez under the name Carr Indosuez Asia in 1992 had “mixed results”, says a WI Carr source. But now Indosuez is again determined “to work more closely with WI Carr as an integrated merchant bank in Asia”, the source says. WI Carr is seen as an integral part of the new strategy devised by Indosuez and McKinsey, and given a stamp of approval by Crédit Agricole. In Paris any rapprochement between CNCA and Indosuez is likely to produce a clash at the highest level. Indosuez, despite calling itself a merchant bank, is as deeply riven with politics as the biggest French banks, say former employees. The people who run French banks “are all from the same class”, explains a French investment banker. “Very few of these people have projects for their banks, they have projects for themselves. They’re all fighting for their own position.” The same phenomenon has been observed at BNP and Paribas, says the banker: “The domestic power-base fights back to take over international.” Only Société Générale, with a more eclectic approach to recruitment and risk-taking, has to some extent exorcised this French curse, the banker says. CNCA/Indosuez is perhaps the only big act of consolidation that can possibly go ahead in a French banking sector which is crying out to be rationalized. With strong trade unions and powerful labour laws, it would be almost impossible for two big banks to combine, lay off staff and achieve economies of scale as they have in the US and the UK. The big banks are looking at Crédit Industriel & Commercial (CIC), but big layoffs are unlikely to be part of any deal. “There’s only room for complementary acquisitions,” says a French bank analyst. The French commercial banks are in no state to make acquisitions anyway. The Association Française des Banques (AFB) has complained of the unfair advantages enjoyed by the mutual and savings bank sector, and by the Poste and Crédit Agricole. Mutual and savings banks can offer customers tax-free deposit accounts, Crédit Agricole and the Caisse des Dépôts et Consignations (CDC) are the only institutions allowed to take deposits from notaries (in the course of notarized transactions such as house purchases). The commercial banks, members of the AFB, are subject to much stricter labour agreements, including a 1937 decree preventing them from opening at weekends. (Other classes of banks can open at weekends.) Also, unlike the mutual and savings banks, commercial banks have to answer to shareholders, the AFB argues. Banque de France governor Jean-Claude Trichet last month warned about competitive distortions in the French banking sector. He expressed concern that “certain types of commercial activity become dangerous when the cost of resources, general overheads and the risk fail to provide enough return on capital to ensure the strength of financial institutions”. The governor “has declared open war on the mutualists, the Poste, the caisse d’épargne…” wrote a correspondent jubilantly in Le Monde. But those in the banking sector are sceptical that Trichet or anyone else is willing to dismantle any distortions in the short term. French treasury officials have warned Crédit Agricole that its exclusive right to notary deposits may not be renewed, according to press reports. But these deposits are not crucial to Crédit Agricole. They amount to around Ffr17 billion and, though they command only 1% interest, they are costly to administer, the bank says. Nevertheless the AFB claims the deposits allowed Crédit Agricole to build up Ffr15 billion in additional capital over the last 20 years. “It’s unlikely Crédit Agricole will be penalized while it’s helping the government to subsidize failing French farmers,” says a ratings analyst. The real competitive advantage of Crédit Agricole is that it is “a really good bank”, says a French banking supervisor. Its purchase of Banque Indosuez was made after “kicking the idea around for four or five years”, say insiders. Crédit Agricole is like a “slow steamroller”. It took years to decide that acquisition was the way into the corporate market. Now competitors are watching impatiently for the bank to make its first strategic mistake with Banque Indosuez. They may be watching for a while. How French banks stack up as bookrunners of international bond issues |
