In the last two years, Rabobank has bought a stake in an asset management firm (Robeco), has been expanding in investment banking and has started negotiations to merge with an insurance firm (Achmea). What are the reasons behind this?
Henk Visser: During the 1990s we have seen the non-interest income of the Rabobank Group increase much faster than interest income. Not just in Rabobank International, where more than 50% is non-interest income, but also in the local retail network. We’re convinced that this institution has a very active role to play with depositors, borrowers and investors, and this has led to us shifting from being the sole investor with our retail and corporate clients to acting as an intermediary. That is why we formed an alliance with Robeco, taking a 50% stake in 1997, with an option on the other 50% which we’re going to exercise in a couple of years.
Another issue on the table was the arrival of the euro. We had to take steps to strengthen our position, and one of the first was to strengthen the group over here in the Netherlands. It is very common that if you are going to become a part of a bigger market, the first strategic move is a defensive one, to create a situation where it is very hard for newcomers to be competitors. And we do already have a big market share in the Netherlands, but we decided to form a cooperation with Achmea Group, and are now in the process of reaching an agreement, and I hope we can form a joint entity in the next year.
And what position has that given you at home?
In terms of market share in the retail and insurance market, we will become in almost every sector number one. Also in terms of asset management we are a very big player because with the assets under management of the Achmea group we add a further Fls100 billion ($53 billion) to the current total of Fls200 billion. In terms of the group’s equity, we’ll be one of the larger players in Europe by tier-one capital.
Where does Rabobank International fit in?
As part of being an intermediary, we decided to expand and consolidate the activities of Rabobank International in investment banking products. Not just for our corporate customers, but also for the institutional investors, and the retail customers.
We took a number of decisions. First of all, to expand our activities in a customer-driven environment, so not with an emphasis on proprietary trading, trying to bring value-added business for our clients, be that in the Netherlands or abroad. Second, we want to position Rabobank International not as a bank within a bank, but as a specialist entity within the group. It has its own customers, but also acts as an intermediary for the retail customers we have over here. So, for instance, we see a very close relationship between Rabobank International and Rabo Securities in the Netherlands, which has a good selling power thanks to the large distribution network of the local Rabobanks. And if we want to expand our investment banking activities, Rabobank International has to be a combination of a corporate and an investment bank, so there has always been a dovetailing between the two different entities, focused on the customers of Rabobank International and the customers of the local banks.
But investment banking is already overcrowded.
Alex von Ungern-Sternberg: For us the key word in putting our strategy together is focus. We’re trying to become a global niche player. What is behind that is that we will go for a number of niches or sectors which have a global applicability. That by implication means that we shall not do an awful lot of other things. Making these choices in any large, diversified international organization is very hard because there is always a good opportunity in one place or another in the world. So far we have been pretty successful at sticking to our guns.
How did you choose the niches, and what are they?
The driving elements were, firstly, who are the Rabobank Group customers; secondly, who should they be. And what do these two groups want from us which they might not already be provided with by an already overbanked investment banking scene?
In equities we’ve decided that we cannot build an all-singing, all-dancing equities unit out of nothing; instead we have put a lot of effort into hiring highly talented people in certain equity sectors which we are going to look at right from the start on a pan-European basis. So one of the luxuries the Rabobank Group has in building its investment banking is that it has not inherited a legacy of structures based on individual European countries, which it has to dismantle first with all the attendant management problems before it sets up a clean, pan-Euro, Emu-oriented investment-banking world. That is a big plus. While other institutions have to downsize, get management to agree what to do, and so on, we are, comparatively speaking, a greenfield site, and it is well-known that greenfield sites are easier to set up than restructuring an existing organization.
In the case of equities, one team, run by Marcus Grubb, will focus firstly on the food and agriculture sector, which we define very broadly; secondly on the health-care sector, which includes pharmaceuticals of course; and third financial institutions, both bank and non-bank. That will end up giving us slightly below 50% of our European business. US and Asian equities are not yet on the agenda. We’re starting with the most important things bearing in mind where we’re coming from and what we are. We’ve hired for that purpose about 70 people in London. We are currently putting straight-through processing systems in place, and hope to start early next year.
What about other product areas?
In interest rates we have one major advantage which no other privately-owned bank has, namely our triple-A rating. In good times people tend to say that a triple-A rating is nice, but not essential, but in bad times they seem to think it’s more on the essential side. So who really wants to deal with a triple-A bank? Well, it’s the whole government sector around the world. They don’t intend to take risks, and have a fiduciary duty not to lose the taxpayers’ money.
So we have set up a fairly comprehensive short-term interest rates group, run by Bill Cuthbert, which brings together all the short-term interest rates at the short end of the curve, which we define as up to three years, whether it’s FX forwards, repos, money market deposits, FRAs, FRNs, you name it. So anyone who wants to deal at the short end can go to this one group, that’s quite an innovative structure, not distinguishing whether it’s a security or not. We did not expect to attract as large a flow of central bank money as quickly as we did.
The rating is also a big advantage when it comes to developing more sophisticated products – for example we started an equity derivatives business, run by Teym Eliazov. Our triple-A status means we can readily cover longer-term transactions. It was a question of building up expertise, and I think the Dutch papers have rightly been full of stories on the deals we’ve brought here in the Netherlands, such as in warrants and reverse convertibles.
We’re also rebuilding foreign exchange, run by Michele di Stefano. The aim is to offer a quality product, but not going on a scale of Citibank, and I’m happy to tell them that. We have a team of approximately 80 worldwide.
What value can you add by covering financial institutions? Surely that’s the most overbanked sector?
We need to be able to repackage our loan books, by securitization for example, and sell them into the market. When I started, a few institutions came to me and said don’t bother building all this fixed-income operation, etc. We can repackage your commercial loans portfolio and sell it into the market. After two or three came to me with this proposal it became clear that Rabobank had half the equation – the assets which these investment bankers wanted to sell. So why should I let them make money out of my half when we can do it ourselves? So we are building a capability for repackaging our own as well as others’ loans. It’s a key product next to derivatives, etc.
Last December we did a securitization of Rabobank International’s Dutch loan portfolio, to the tune of Fls10 billion in the US commercial paper market, called Atlantis. And a second one is on the way, called Atlantis 2.
You rarely lead-manage your own Eurobonds alone. Does that indicate how far you have to go?
Clearly we are starting from way behind, with many competitors. But you do have to distinguish there between the currencies. Anything to do with guilders or Deutschmarks we lead-manage perfectly happily on our own. When it comes to other currencies – such as our $500 million or Ffr3 billion issues in September, we do not yet have the distribution into those markets which usually buy those products. And these funds are being raised for the whole Rabobank Group, so why should the rest of the bank be denied funding purely because the investment banking arm does not have the capability yet.
We’ve made no secret of not having adequate penetration of the German and French institutional markets, or the UK, let alone the US. We don’t feel embarrassed by having to use other houses. They look upon us as a customer for whom they can provide a service. As our own capacity increases, we expect there to be fewer cases where we choose other lead managers, but we do not expect to stop the current practice.
And how are you increasing that capacity in debt capital markets?
This is where we’ve had to make the most choices, or at least the least obvious choices. We came to the conclusion that it would be foolhardy to become a major player in US treasuries and corporate bonds. That has been a very difficult market for European investment banks. So the catch-up, merely by avoiding cul-de-sacs, has become correspondingly easier.
Our approach is that we want to be – and will be – sales driven for certain products only and in certain markets only. All our global heads, whether debt, equity or forex, had the majority of their professional training on the sales side. It’s very easy to slip into proprietary trading when volumes are down, and you take on a bit more risk. But if your background is servicing customers, and that’s what you feel most comfortable with, you are more likely to stick to your mission. And so far, it’s early days I agree, we have stuck to our mission.
We will go into Eurobonds – but not in all major currencies as we don’t have the necessary distribution into the US. But we’re a good euro house trading in euro governments, whether Dutch, German, Italian or Spanish, or in corporate bonds in the euro. Do I measure that in league tables? Not really. We want a role where we will be an attractive partner to talk to. It’s a process of efficiently managing the transformation from a Dutch guilder house to a being a respected euro house, and raising our profile sufficiently in the euro markets. Did we define it by saying it had to be not less than number 10? No, we didn’t, and I think it’s too early too do that. But we’d find it a failure if our core customers, including those in the non-bank financial institution sectors, would not regard us as a core bank in that business, say in two or three years’ time. I am confident that Michael Ice, who runs this business, will be successful in achieving this position.
Yet you’ve done few deals in debt or equity.
We’ve yet to do equity deals, but even pre-crash we had clients looking to us to help bring them to the markets, saying that by the time we’re ready next year, so will you be, and you should count on us selecting you to lead-manage our transactions. And on the equity research side we’ve hired top-rated Extel and Reuters analysts, and our pan-European sector-based research will start to go out in October or November.
Of course we already had a research capability, before my arrival, in soft commodities – why does the potato world look like this, the structure of the rice industry, we know about chicken feed and how that relates to chicken prices. And a lot of CEOs of large companies use that, yet somehow we never commercialized it. What we’re trying to do in equities, for example, is to use all this know-how by converting it into equity-relevant research, commercialize it if you like, make it attractive for people to use on a broader scale.
How long will it take to gain critical mass?
It would be wrong to assume that Rabobank International has been making a loss; our investment-banking operation made good returns in excess of 10% – we don’t publish more details in that respect. I did not join this bank to find a lake of red numbers; the challenge is to change a profitable operation into something which has a much wider customer reach around the world with a broader product range, servicing more demanding Dutch customers, and for the first time non-Dutch customers with more international products – we were very guilder orientated. In an Emu world you have to get out of the guilder trap. We expect to see visible results in this area in 1999. Last year we put forward a three-year plan. We measure our success not just in terms of P&L, but also in terms of penetrating customer base with products they want. So far net revenues have increased, so have costs, but we’re not losing money.
Visser: Of course, if you are active in a fairly competitive market, you have to be market-oriented and set more or less the same goals as the other players in terms of performance, and pay market-related salaries. Also, it has to add value to the customers. I see a customer a day: a customer a day keeps the competitor away. If I compare it with three years ago, it is completely different. We took the decision right on time that it was not possible to service the customer if we had not gone into investment banking products. The feedback we get from the customers shows that we’re on the right track. We have a very selective target, going for a global niche player. We don’t have the ambition of being number X player in all the different areas. Of course, the future will tell whether we have chosen correctly, but what we can say is that the customers like it, and the people and newcomers really believe in our strategy. I’m not so afraid of all the other players, frankly.
Is it easier pursuing your strategy because you’re not a listed company, without pressure form shareholders and analysts?
Maybe if you are a publicly-quoted institution it’s that much harder. We have done everything more or less step-by-step. It was also easy for the bank to make a major acquisition. ButI wouldn’t want you to think that because we’re not a joint-stock company we’re not subject to the same disciplines. All the ways of assessing whether you’re successful or not are done internally. We measure our return on equity, balance-sheet usage, regulatory capital. Our customers look at that as well. And in the end we have our rating.
Would a downgrade bother you?
Our policy is that unless we have to make some very major strategic decisions, we’d like to follow this route, and keep the rating for as long as possible. It’s helpful for our position in the financial market, but we also use it a bit for internal purposes. It is more or less an incentive to perform everyday a bit better than the day before. And the people in the bank are very proud of having this rating.
Ungern-Sternberg: And despite the fact that we are starting a number of new products, which clearly have some market risk, total market risk limits have not actually been increased. That translates into volatility of earnings that is less than otherwise would be expected. One has always assumed that investment banking and treasury will result in more volatile earnings, but only if limits are made available for that. It was decided that the limits in place at the time I arrived need not be increased. We reviewed it with the product managers and they agreed, and didn’t want more market risk. So the likelihood of a downgrade [as a result of Rabobank International’s investment banking] is a non-sequitur. And the recent volatility was not worrisome as we were hardly exposed.
Visser: And we’re now more customer-driven, and have less market risk from prop trading than we did, say, three years ago.
What benchmarks have you set for Rabobank International? How much money do you have at your disposal?
Ungern-Sternberg: The way Rabo looked at it was: what will it take to become a global niche-orientated investment-banking business, especially in terms of people. So on front-office side we’d hire 350 to 400 additional people worldwide during the first three years – but that does exclude south-east Asian and US equities. If we were to follow that route in the future, we’d need more. And that is without looking at systems development, back office, etc. This follow-on investment was very difficult to quantify at such an early stage. So it wasn’t a question of a specific sum of money.
Are there clashes between the old and new Rabobankers?
Well, there have been arguments, but certainly not months and months of warfare as has happened elsewhere. And as a greenfield operation we have more options to sort these disputes out as we don’t have as many vested interests and turf battles.
But as a greenfield you can build as much as you want; you still need to get clients.
Yes, that’s the flip side, no brand name in investment banking, no record. But that’s why we’ve brought in well-known professionals who have industry knowledge, reputation and drive.
Was it difficult to persuade people to join Rabobank International?
I’ve hired about 230 people since I started in April last year. That’s a lot of convincing, endless dinners and discussions with the targets, and other people in Rabobank, to convince people that it’s not just Rabobank entering dreamworld. I’d say 75% of those we’ve hired actively chose us over offers from either their existing employer or other banks.
Are you concerned that you’ve got hired guns who’ll leave once their guarantees run out?
That’s always a worry in this business. We’re paying the market rate on salaries, often the top quartile of that rate because we are hiring those coming from some of the top houses. As for bonuses, we have often guaranteed only one year’s worth. There are very few cases where we’ve had to go out to two years. It depends on how established we are in a business and on the maturity of the team. Whether people leave after the guarantees run out will depend on how well all parts of Rabobank International work together. It is a question of progress in converting a vision into a reality.
