Awards of Excellence: Best in the world
Awards for Excellence: Nordic region
Awards for Excellence: Latin America
Awards for Excellence: Middle East
In the world’s largest banking market, size is becoming increasingly important. The merger of Citibank with Travelers Group creates a group with a value of more than $140 billion. On a pro-forma basis, the company would have had assets at year-end 1997 of almost $700 billion, net revenues of nearly $50 billion, operating income of approximately $7.5 billion and equity of more than $44 billion. Its market capitalization would rank it number one among the world’s financial services companies.
BankAmerica has joined NationsBank (see below) to create another giant. And BancOne has merged with First Chicago NBD to create a competing national retail and business banking franchise and the largest bank in the Midwest. The new BancOne will be the number two credit-card issuer with $60 billion in managed receivables and the number one lender to small businesses. Its investment-management business will have more than $100 billion in assets under management. It will have more than 2,000 offices nationwide. Its total managed assets will be $279 billion, its common equity nearly $19 billion and its market capitalization approximately $72 billion.
The trend is the same across the border. Royal Bank of Canada and Bank of Montreal announced they were to merge to form a Canadian superbank and almost immediately Toronto Dominion and CIBC followed suit. In the TD/CIBC case the combined company will have more than 10 million customers in Canada and around the globe, shareholders’ equity of more than $18 billion and assets of $460 billion. It will be the 10th-largest institution in North America in terms of market capitalization. Its customers will have access to a network of over 6,000 ATMS, one of the largest networks in North America, over 2,300 retail outlets in communities from coast to coast, a complete range of financial products and one of the largest telephone and computer banking operations in North America. The new bank will have the number one credit-card sales volumes in Canada and the most complete range of insurance products offered by any financial institution in Canada. It will also be the number-one Canadian bank in international loan syndications.
The drivers of consolidation in the US and Canada are similar. In the US, deregulation of interstate banking laws has created competition which has in turn forced prices down. Faced with the commoditization of their products, banks have to achieve low-cost high-volume production. Nationwide distribution and economies of scale are the only way to achieve this.
In Canada pricing is even tighter than in the US and the banking market is fragmented. For example, even if the five largest Canadian banks all merged, their total share of the Canadian financial market in residential mortgages would still be less than 50% and they would hold only 56% of personal deposits and 22% of mutual funds. The big six have only about 48% of the total assets of the major classes of consumer credit-granting and deposit-taking financial intermediaries.
This fragmentation is inefficient and also allows foreign banks to cherry-pick the best business. The Royal Bank merger was explained by management as “a Canadian response to the sharply rising level of global competition in the financial services market”.
Canadian institutions have watched with alarm as new international competitors have continued to enter the Canadian marketplace, joining global giants like HongkongBank and Citibank that have already carved out a significant presence in Canada. For example, overseas competitors such as Wells Fargo, MBNA, Capital One Financial, Fidelity, ING, GE Capital and others have made forays into the domestic market recently. John E Cleghorn, chairman and chief executive officer, Royal Bank of Canada, worries that: “These international financial services giants threaten to marginalize much smaller Canadian banks in the international market, and gain a competitive advantage in Canada by applying their greater scale and investments in technology.”
Whether or not the authorities, traditionally hostile to concentration in the banking sector, will allow the mergers to go ahead remains to be seen. Simon Brady
US
Best bank: BankAmerica
Best foreign bank: ABN Amro
Best securities firm: Merrill Lynch
Best foreign securities firm: Warburg Dillon Read
The new Citigroup may be the world’s largest global financial services provider, but in its home market the bank comes second to another newly created behemoth. The combination of BankAmerica with NationsBank will create the first truly US-wide institution and its retail and small- to medium-size business network will far outstrip its nearest competitors.
David A Coulter, chairman and chief executive officer, BankAmerica Corporation, gives a few of the key statistics: “It will be the nation’s largest branch network with 4,800 branches. Its branches will be in 22 states – more than any other bank. Twenty-nine million American households will have deposit accounts with us. It will be the nation’s largest ATM network, with nearly 15,000 ATMs.
“The new company will be number one in loans and deposits, the number one commercial and industrial lender, the number one small business lender and number one in mortgage servicing – all of this in tandem with an already powerful international franchise.
“We will have 2 million business customers. We will have more primary relationships with large corporate customers than any other bank by far. We will be number one in domestic cash management and the number one provider of derivatives and liability management advice for US companies.
“Combined, we do more agent-only syndicated loan deals than anyone in the business. With BankAmerica’s Robertson Stevens and NationsBank’s Montgomery securities, our company will be the leader in IPOs and venture-backed IPOs.
“With the headquarters of our wholesale bank in San Francisco, we are perfectly situated on the Pacific Rim (which I define as stretching from Chile to India to Chicago).
“And we will be among the leaders in trust and asset management, mortgage originations, credit cards, consumer finance, and investment banking.”
Merrill Lynch, though it appears to be moving ever more aggressively into traditional banking markets, is still the dominant securities house in the US. With offices in 49 states, $1.5 trillion in US total client assets and a leading position in all the key debt and equity products, the firm has also embraced scale as its preferred competitive advantage. In the muni market, for example, Merrill has underwritten $240 billion since 1980.
In 1997 – a record year in US M&A – Merrill ranked top in both announced and completed US mergers and acquisitions. Announced transactions totalled US$269 billion. The company also ranked number one in US equity and equity-linked underwriting, with a 15% market share as well as topping the debt underwriting tables. This is the ninth year in a row Merrill has been number one in debt and equity underwriting.
Most impressively for such a large organization, Merrill has managed to maintain centres of excellence: in 1997 it was again Institutional Investor’s All American Research Team winner with 47 team positions.
Thriving in the graveyard
No foreign institutions come close to the franchises of BankAmerica or Merrill, but one has the distinction of being the only foreign firm to have succeeded in building a successful and profitable banking business in the US.
ABN Amro’s North American pre-tax profit jumped from Fls1,088 million ($536 million) in 1996 to Fls1,505 million last year, an increase of 38.3% and the bank continues to expand through acquisition.
The bank owns LaSalle as well as European American Bank (EAB), the latter a successful retail operation now experimenting with in-store banking. To reinforce its successful leasing activities, EAB acquired Bankers Leasing Association. In 1997 ABN Amro became the ninth-largest mortgage lender in the US with the acquisition of Standard Federal Bancorporation. And the earlier purchase of Chicago Corporation gives ABN Amro a full-fledged investment banking operation in the US.
The 11 ABN Amro branches in the US also reported strong results in 1997. Complex structured finance solutions for corporate clients contributed to the strong performance. In an effort to improve capital ratios, a $5.5 billion asset securitization programme was completed at the end of 1997.
The US has been a graveyard for foreign securities houses. Even Deutsche Bank – with the high-profile hire (and later departure) of Carter McClelland – had to scale back bold ambitions and concentrate on niches such as high-tech IPOs. Last year’s winner, Union Bank of Switzerland, has continued its success in US capital markets and M&A. The combination of its US activities with those of Warburg Dillon Read will create the only foreign institution able to compete with domestic firms in debt, equity, M&A and asset management.
Canada
Best bank: Royal Bank of Canada
Highly commended: CIBC
Best securities firm: TD Securities
Highly commended: CIBC Wood Gundy
Best foreign bank: Citibank
Best foreign securities firm: Merrill Lynch Canada
Canada’s big six will soon be the big four, although it will be months before the mergers of Royal Bank of Canada/Bank of Montreal and Toronto Dominion/CIBC are ratified. In the meantime, the banks’ different strategies make them difficult to compare. The largest, Royal Bank of Canada, with its network of 1,500 branches, clean balance sheet, consistent earnings growth and improving cost/income ratio leads the pack in domestic retail. Its capital-markets activities have also been a strong and steady earner.
However, it seems already to have recognized the limitations of its domestic and retail-oriented approach. Having failed in a C$2.4 billion (US$1.6 billion) bid to buy one of the largest insurance companies in Canada, London Insurance Group, it has joined with Bank of Montreal. The latter owns Harris Bankcorp, a regional bank based in Chicago, and a 16% equity stake in Grupo Financiero Bancomer of Mexico. It was the first Canadian bank to earn more money outside Canada than at home.
RBC’s competitors certainly have more aggressive international strategies – Bank of Nova Scotia in emerging markets and CIBC in the US – that may prove the foundations of outperformance in future. This makes CIBC a close runner-up in the awards.
The title of best securities house is also difficult to award. CIBC World Markets is a full-service investment bank with 8,000 employees in 61 cities. Following the purchase in 1997 of Oppenheimer & Co for US$525 million, it goes under the name CIBC Oppenheimer in the US (the CIBC Wood Gundy tag is for Canada, Japan and Australia), has a top-rated 130-strong equity research team and is hiring teams in other areas. In June, 20 UBS securitization specialists joined, for example.
However, Toronto Dominion Bank’s move into discount brokerage just wins TD Securities the award for best domestic securities house. The C$726 million acquisition in 1996 of Waterhouse Investor Services of New York, one of the biggest discount brokers in the US, has combined with TD Securities’ dominant Canadian Green Line brand to create a highly profitable and fast-growing business. The emphasis looks smart as discount brokerage is growing rapidly in the US and elsewhere. The firm has also bought Australia’s biggest discounting firm, Pont Securities, and has opened a joint Waterhouse/Green Line office in London. Toronto Dominion is also the leading bookrunner on Canadian dollar-denominated international bonds.
Merrill Lynch Canada is a member of all five Canadian stock exchanges, is the top-rated house in Canadian dollar research and execution, and over the past 12 months has acted as bookrunner on more international bond deals for Canadian issuers than any other house.
Merrill has been in Canada since 1952 but the beginning of its present hegemony was the 1969 acquisition of Royal Securities, one of Canada’s oldest and most prestigious brokers. The firm’s next giant step in the market will again be the result of acquisition.
The announcement at the end of June that Merrill is to buy Midland Walwyn, Canada’s largest independent full-service securities firm, in a pooling-of-interests transaction with an estimated value of C$1,257 million (US$855 million) confirms not only the bank’s position as top foreigner but also signals its intention to dominate the entire North American investment-banking, broking and asset-management markets. The deal is precisely what the chairmen of Canada’s big banks fear.
Midland Walwyn has 3,240 employees, including 1,275 financial advisers, and 116 retail branch offices throughout Canada. It also has offices in four other countries. There are approximately 600,000 client accounts at Midland Walwyn with C$42 billion (US$28.5 billion) in assets. It is one of the top-five underwriting firms in Canada, with strength in IPOs and a number of industry sectors.
Its asset management business, Atlas Asset Management, offers 24 externally managed mutual funds with approximately C$3 billion under management. Midland Walwyn also has 26 equity research analysts covering 250 companies, and its research group is ranked number three in independent surveys.
The new group will face increased competition from the product of another merger. Bunting Warburg is the Canadian operation of the new UBS. The firm was already a respected international house in the research, sales and trading of Canadian equities and the addition of the two merging banks’ skills in the US – it sells more non-US stock into the US than anyone else – will boost the Canadian operation. Simon Brady
