Awards for Excellence: Nordic region
Awards for Excellence: North America
Awards for Excellence: Latin America
Awards for Excellence: Middle East
BEST BANK: Citibank
This may be the last year it is possible to give just one best bank award. Banking is changing so fast, and banks’ strategies for coping are so different, that straightforward comparisons are becoming harder and harder to make.
Contenders for this award this year fall into four groups: those trying to become global providers of wholesale banking services; those trying to become global consumer banks; those with the infrastructure to offer operating and transaction services globally; and those aiming to create global asset-management businesses. Outside these groups are specialists – Bankers Trust and Nomura for example – and the national and regional institutions whose future looks less certain.
The leading wholesalers are Chase, Merrill Lynch the new UBS and, slightly behind, Credit Suisse. Chasing this elite trio are JP Morgan, Bankers Trust, Deutsche Bank, ABN Amro, Dresdner Kleinwort Benson and Lehman Brothers. These houses have significant operations in the key time zones through which they can offer debt and equity underwriting and broking, corporate finance advisory skills and the full range of commercial lending and treasury products.
There are perhaps only three institutions now able to deliver a consistent level of products and services in sufficient markets to warrant the description global consumer bank: Citibank – the leader by far – American Express and HSBC Group. However, all these institutions still trail UBS and Credit Suisse in the high end of the market – global private banking.
Far less glamorous, and visible, is the transaction processing business. In the long term it is questionable whether these services – such as cash management, payments processing and custody – will be performed by banks at all. In the medium-term it is clear though that only banks with large global networks and huge technology spends will be able to compete in what is a high-volume, low-margin business. Citicorp, Chase and ABN Amro lead – with competition in custody from Bank of New York and Morgan Stanley – and HSBC follows on the back of its strength in Asia and growing operations in Latin America.
The greatest prize in global financial services, asset management, is still a fragmented and national business. A handful of firms such as Merrill Lynch and Fidelity are successful outside their home markets, but today there is no outstanding leader in this field. Whether that leadership will come from firms that have both product and distribution – such as newly merged Morgan Stanley Dean Witter Discover or Merrill Lynch-MAM or Citigroup – or from looser alliances between global product providers and local distribution agents (regional banks for example) is unclear.
This year’s best bank, Citibank, just outpoints Chase. It is leader in two of these global businesses and a contender in the others. Its strategy, becoming a leading local provider of basic commercial and retail banking services in its 98 country network, wins it dozens of our country awards, our foreign exchange, securitization and transaction processing awards and gives it top three status in syndicated lending, project finance and trade finance. In addition, its key weaknesses in equity and debt capital markets and M&A will be addressed by the merger with Salomon Smith Barney. Chase still looks more likely to dominate the high-margin cross-border wholesale markets but to ensure this dominance it still needs an acquisition. The obvious candidate is still JP Morgan. Simon Brady
HIGHLY COMMENDED: HSBC GROUP
BEST GLOBAL INVESTMENT BANK AND BEST BROKERAGE HOUSE: Merrill Lynch
Gone are the days when a $6 billion merger or acquisition was a large deal. The mergers of last year tore up that rule book, and the mega-mergers of this year, led by the Citicorp-Travelers merger wrote a new one.
And yet with just (a relative term) $6 billion, and some loose change, Merrill Lynch has managed to maintain the momentum of being the fastest-moving, trend-setting investment bank for others to envy. Three deals make up that $6 billion. The first was the £3.1 billion ($5 billion) which was paid in November last year for Mercury Asset Management (MAM), one of the world’s best-known and respected asset management firms.
The price, as Merrill freely admits, was a full one for a firm which might, on its own, have reached its peak; there was talk of possible culture clashes, and recent losses of large pension mandates must be cause for some concern. But the acquisition at a stroke gave Merrill a significant stake in the institutional asset-management business to complement its own more retail-focused fund-management business in the US. And seven months after the acquisition, no senior staff have left.
The second deal came at the start of this year, when roughly $1 billion was paid to hire 2,000 former Yamaichi brokers in Japan, many of whom will be used in the joint Merrill-MAM bid to break into the Japanese savings market, which until deregulation was virtually off-limits to non-Japanese firms.
And lastly was the recent acquisition of one of the few Thai brokerage houses to have survived last year’s turmoil. $68 million was paid for a 51% stake in Phatra Securities (now to be called Merrill Lynch Phatra Securities).
Merrill is not the only firm to have bought in at the height of the Asian crisis – Banco Santander, Société Générale and Commerzbank are some of the others – but only Merrill has done so from a postion of global strength and, more important, with a successful history of buying into local markets. Between 1996 and 1997, Merrill bought into a Spanish firm (FG Inversiones Bursatiles), a South African brokerage (Smith Borkum Hare) and McIntosh Securities in Australasia.
“Our strategy is to be a player at both the local and the global levels,” says Herbert Allison, president and chief operating officer. “We have found that our clients want the flexibility of being able to go to either, and we have positioned ourselves to be able to do that.”
In terms of both financial statistics and market presence, Merrill has enjoyed a great deal of success as a result. Earnings last year were a record $1.9 billion, and return on equity was 26.8%. And by mid-1998 market capitalization stood at around $30 billion. Such strong earnings and capital base give Merrill the flexibility to expand internally and through the acquisitions. For example it has used its balance sheet to develop its syndicated loan business. Its success in buying what generally turn out to be the right pieces rests in large part with its global strategy unit, headed by Jerome Kenny in New York. Kenny and his team devote most of their time to analyzing the trends of the financial services industry, and determining how, or if, Merrill should address weaknesses in certain parts of the business. It was Kenny, for example, who identified MAM as the fund manager that would best suit Merrill’s requirements, and he also played a major role in the battle to buy Smith New Court.
Push into Europe
With Kenny assuming this role, product heads can concentrate on developing their businesses. Not only has Merrill been able to export its domestic success in US debt underwriting to Europe and elsewhere, but through its acquisition of Smith New Court it has developed an equities business in Europe – it ranks in the top three for international equity issues.
And the firm has made huge strides in developing its M&A advisory team. In recent months Merrill has been involved in several of the major financial mergers, including NationsBank in its merger with BankAmerica, BancOne with First Chicago, Almanij with Cera, and both Credito Italiano and Unicredito in their $16.4 billion merger.
Merrill Lynch is one of the most balanced investment banks in terms of services offered, at least at present. In addition to strong equity, M&A and debt divisions and a growing presence in syndicated loans, it has been successfully expanding its previously small foreign-exchange operations (Merrill came eighth in our May forex poll). And Merrill’s research departments across all products are widely respected. Its acquisition of MAM also makes it one of the few institutions to have a truly international presence in both retail and institutional asset management.
The challenge will come in the next 12 to 24 months as competitors begin to see the results of their mergers and acquisitions. Morgan Stanley Dean Witter and Citigroup are the two obvious contenders in years to come, and Goldman Sachs is likely to initiate new operations once it raises money through a stock-exchange listing. Considering how Merrill has until now managed to stay at least one step ahead, it is unlikely that Allison and his array of senior managers will allow the lead to slip away that easily. Antony Currie
HIGHLY COMMENDED: MORGAN STANLEY
MOST IMPROVED BANK: Chase
Though its stock price may not yet reflect it, Chase has significantly strengthened its position in the global wholesale markets. Its US strengths have long been clear – the bank is the number one primary relationship bank to the Fortune 1000 – but it is also the leading cross-border financing bank in many of the 50-odd countries in which it operates.
The bank is top in the primary markets for emerging-market bonds and loans; it is top in the syndicated loan, project-finance and trade-finance markets; it is a leader in spot and forward foreign exchange; and it is one of the world’s largest derivatives houses.
On top of these dominant positions the bank is building a world-class debt capital-markets business as well as a specialized equity division. It has become a leader in the cross-border private-placement market and is a specialist in asset-backed private deals. It is rising fast up the investment-grade debt league tables and has broken into the bulge bracket in high-yield – it’s now fifth – in just three years. This makes it the fastest growing high-yield house on Wall Street.
Its fixed-income research has also improved dramatically. In Institutional Investor’s 1997 All-American Fixed-Income Research Team the bank won seven positions.
These advances have shown up on the bottom line. Global investment-banking revenues rose from $834 million in 1996 to $1.02 billion in 1997 helping the bank to improve its overall return on equity from 18.35% to 19.48%. Simon Brady
MOST IMPROVED INVESTMENT BANK: Greenwich NatWest
“A big symbolic part of the change of culture here is a new dress code,” explains Chip Kruger, co-chief executive of Greenwich NatWest. “Ties are out. You wear what you feel is appropriate within certain parameters.” But on this particular Monday morning the dress-down policy is not much in evidence. Kruger and Frank Canelas, head of credit products, are in suits and ties. The only senior manager without a tie is another American, Stephen Sinacore, a recent recruit from JP Morgan who has embraced the more relaxed style of his new firm with zeal, sporting trainers as well as casual shirt and trousers.
When Kruger took over from Martin Owen as head of NatWest Markets last year he was determined to change more than just the culture of the firm. The business was in trouble. Last year NatWest Markets lost £706 million, of which the global equities business accounted for $506 million. In February last year the bank discovered a big hole in its derivatives business. In 1997 NatWest Markets took a £77 million charge for mispricing interest options and swaptions.
But the problems had started a couple of years earlier. In pursuit of its strategy of building a global, full-service investment bank, NatWest made four big acquisitions. In 1995 it bought Gleacher, an M&A boutique. The following year it made three purchases: the US firm Greenwich Capital (headed by Kruger and Gary Holloway, now also co-CEO of Greenwich NatWest); an independent advisory business, Hambro Magan; and asset manager Gartmore.
These acquisitions brought with them their own traditions and philosophies. Greenwich, for example, was a 1981 start-up modeled on Goldman Sachs. It was small enough to enjoy a cohesive and friendly culture with a tight day-to-day grip on costs. “We had to worry about practicalities like how to pay the electricity bills,” recalls Kruger.
NatWest, by contrast, was losing control of costs. “All these acquisitions were made in an industry environment of rising wages,” says Kruger. “But when we arrived we realized there was underspending on the back office. At Greenwich we were very aware of the importance of keeping the support of operations people. There is nothing more demotivating than to lose money out of the back door.”
The bank wasn’t only neglecting the back office. Most of NatWest Market’s management team had backgrounds in commercial banking and lacked the skills needed to pick and hire front-office talent. By the middle of last year, NatWest employed a lot of very demotivated investment bankers. “It was hell around here,” attests Canelas.
Owen left in August. Kruger took the job of CEO and embarked on a radical change of strategy. The headcount was reduced from 8,000 to 3,000. The treasury business and the independent advisory operation – now called Hawkpoint Partners – were spun off as separate companies within the NatWest group. And, most important, the equities business was sold.
A tale of two sell-offs
The comparison with Barclays’ sale of its equities business, BZW, could hardly be more stark. While the BZW disposal degenerated into highly public internecine warfare and an auction in which there was only one bidder, NatWest quietly sold its equities business to four separate buyers at a premium to book value. Bankers Trust bought the European cash equities operation for £129 million and Deutsche paid £50 million for the US and Asian equities business. Meanwhile the operations based in Australia and Hong Kong were sold to Salomon Smith Barney and Industrial & Commercial Bank of China respectively for smaller, undisclosed amounts.
That left a debt business with an image problem. Canelas has responsibility for hiring traders. “Between June and August we couldn’t accomplish much in terms of hiring people,” he says. “But since then we have taken on a lot of good people – some really smart traders.”
Two things made the difference to the firm’s reputation. First, traders from rival firms could see that Greenwich – still known as a smart and well-run business – had effectively taken over NatWest’s investment-banking operation. The debt business, which had been run by Holloway, was renamed Greenwich NatWest: Holloway and Kruger became co-CEOs. Second, the firm was doing some notable deals.
Back in March 1997 it launched the first securitization deal for UK housing associations, a £938 million issue known as Fresh. Then in October the firm followed up the groundbreaking October 1996 Rose loan-book securitization transaction with the $5.4 billion Rose II. Last March Greenwich NatWest carried out the first securitization of a UK student loan portfolio, the £1 billion Thesis deal.
By next month, with the release of NatWest’s half-year figures, it should be clear how quickly the business has been turned around. A three-year plan put together last year aims for the business to return to profit by the end of 1998. Kruger is confident that the firm is ahead of schedule. Looking further ahead, the aim is for Greenwich NatWest to be making a return equal to, or above, that of the bank as a whole (which in turn is aiming for a return on capital of 17.5% or above) by 2000.
One way to achieve that level of profitability is to motivate staff. Kruger makes a point of spending time on the trading floor. The two co-CEOs hold regular dinners, inviting a mix of employees from back and front office. They send bottles of wine to staff who have put in extra effort. “A couple of weeks ago,” recalls Kruger, “we had a batch problem. Our operations people stayed for 48 hours straight to fix the problem. We didn’t force them to do that.”
The other way of making the firm profitable is to get out of businesses which don’t make a decent return. But now that so much of NatWest’s investment bank has been sold off, does what’s left amount to a coherent business? Kruger sees four areas of focus: sovereign, credit, securitization and swaps. “Greenwich Capital has a profitable US treasuries business,” says Kruger. “There aren’t many firms who can say that.” But the big money-makers are swaps and securitization.
He believes that the euro is a big opportunity for the firm. “We play in the funkier products,” he says. “When you take away the currency angle, it becomes an easier sell for us.” Greenwich NatWest may not have the European distribution of some of its rivals from the continent, but Canelas believes creating distribution from scratch has its advantages. “A lot of European firms have very fragmented distribution,” he says. “As we’re building, we have the chance to be more focused. We’ve hired no more than 30 sales people but they are the very best.”
So what lies further ahead if the firm achieves its target of becoming a highly focused, profitable business by 2000? Would NatWest be tempted to reap the benefits of that recovery and sell out to concentrate on retail banking? “I think commercial banks are going to need a sophisticated debt capital-markets business more in future not less,” says Kruger. “At the moment, in spite of everything we’ve been through, we feel pretty positive most days about being part of NatWest. And we hope that NatWest is getting good value from us.” Michael Peterson
HIGHLY COMMENDED: SALOMON SMITH BARNEY
BEST SMALLER BANK: State Street
State Street became one of the world’s most profitable banks by concentrating on doing well the things other banks weren’t interested in doing. It is a world leader in custody, cash management and securities pricing, activities once seen as at best a marginal sideline, at worst as an expensive distraction from a bank’s core business.
For much of its history – it was founded in 1792 in Boston where it is still based – State Street was a regional US firm doing orthodox commercial banking. The decision to sharpen the focus sprang from a series of strategic reviews in the 1980s. “We define our strengths as combining information technology with banking, custody and securities processing,” says David Spina, the bank’s president and chief executive.
The focus on a relatively small number of institutional clients has remained broadly the same for the past decade. The biggest changes have been in response to the potential of new technology. “We focus on everything that happens to securities after the trading decision has been taken,” says Spina. “We are working to broaden that to include related areas. We are getting involved in executing trades electronically, although we don’t aim to become a big-block trading house.”
Working out which businesses make sense for State Street, and which it can lead, has provided the bank’s shareholders with impressive returns. Earnings per share have grown in double digits for the past 20 years and increased from $1.50 in 1995 to $2.37 in 1997. The bank made a return on equity of 18.1% in 1996 and 20.6% last year. Net income was $380 million last year, having grown 24% in 1997 and 30% the previous year.
State Street makes an enviable amount of its money from fees rather than interest: 71% of its total revenues of $2.3 billion. That reflects the skew of its business. Although commercial lending accounts for 21% of operating profits, nearly 64% is from what it defines as services for institutional investors – custody, information services and daily pricing – and 16% is generated by investment management.
The core of the business is providing custodian services to mutual-fund clients. Total assets under custody are valued at $3.9 trillion and State Street claims to be the world leader in this business. Pricing US mutual funds is also a big money-spinner.
But increasingly State Street is managing assets itself rather than simply processing them. It manages assets of $390 billion; passively managed equities account for the largest chunk. Another area of rapid growth is foreign exchange. Forex trading revenues have increased by 74% over the past two years to $245 million.
The big change to State Street’s strategy is geographic. The US still accounts for 77% of the bank’s revenue, but a lot of growth is likely to come from other markets. “Our strategy has evolved to take account of the growth of global investing,” says Spina.
In April State Street gained a full UK banking licence, which allows it to operate fully in Europe from its London headquarters. Spina believes the UK’s asset-management market is well ahead of the rest of Europe. But he wants European institutional investors to buy the bank’s other services.
As a firm devoted to institutional investors, you would not expect State Street to have anything to do with Belgian dentists, the archetypal private Eurobond investor. But the bank trumpets the work it has done with the Belgian pension fund for doctors, dentists and pharmacists as an example of the way it is bringing new cash-management skills to Europe. The fund wanted to increase returns from the cash portion of its portfolio. State Street took over the handling of its cash portfolio and invested it in one of its offshore dollar funds.
State Street’s unusual focus makes for an unconventional culture. Spina, who joined the bank in 1969 as a credit analyst for the commercial-lending department, defines the culture as one in which people “like to win”. In a highly time sensitive business there is a pride in doing jobs well and at the right time. “At 5:30 in the US we can price large complicated pooled funds and stand behind that number,” he says. State Street is also an environment where great value is placed on rather arcane knowledge. “There are a lot of people around here who enjoy knowing things which might not seem exciting to outsiders, like how to settle trades in a new market,” says Spina. But he insists that as a place to work the bank is “fun”.
Most of State Street’s recent growth has been organic. In fact, says Spina, 80% has been from existing clients. There have been small bolt-on acquisitions. In October 1997 the bank bought the research division of Advanced Investment Technology, an operation carrying out quantitative analysis using neural networks. Last December State Street announced the puchase of the Bank of Scotland’s unit trust trustee business.
But many see State Street less as a buyer and more as a potential acquisition target. Spina agrees that other banks may be envious of State Street’s focus and profitability but says: “We’re not for sale. Our record of delivering earnings growth means that our shares are valued a little bit higher than some others.” Indeed, in mid-June State Street was trading on a P/E ratio of nearly 28. That would make it an expensive buy. But then again, these are times when some firms are prepared to pay a hefty premium for the right sort of business. Michael Peterson
BEST SMALLER INVESTMENT BANK: Banco Finantia
Portugal is an unlikely home for an international investment bank. Banco Finantia may not yet be a global player of any significance but it has built a profitable business linking its home market with growing outposts in Brazil, London and New York. Over the past few years the firm has shown itself quick to exploit opportunities, for example, introducing international borrowers to the Portuguese caravela market and developing a niche in African project finance.
Finantia’s financial performance has been impressive by European standards. Its net profits of Esc2.5 billion ($13.9 million) represent a return on equity of 12.4% and return on capital has consistently been in double figures, while earnings per share have grown by 19% since 1994.
The driving force behind Finantia’s international strategy is its president, António Guerreiro, a former employee of the World Bank who founded the firm in 1987. He defines Finantia’s strategy as focusing on “a corridor between Latin America and Europe. We aim to be a bridge between Portuguese and Brazilian companies and the global financial markets”.
The two core areas of Finantia’s business are equity broking, and bond underwriting and dealing. In the debt markets the firm has arranged escudo issues for several Portuguese and foreign borrowers. Last year, for example, it arranged caravela (foreign escudo) bonds for Goldman Sachs and Salomon Brothers. It has also led domestic and Euro issues for Brazilian borrowers such as media company Globo and Banco CCF. Not surprisingly, given the size of the Portuguese market, deals are typically small. The biggest public bond issue it arranged this year was an Esc18.5 billion five-year deal for Mexico in May.
Facing up to the euro
Guerreiro believes that Finantia’s capability in the Portuguese market will continue to be important after the introduction of the euro. “We will be dealing in euros not escudos,” he says. “But issuers will still need capital. We need to get used to transactions becoming larger and there will be tougher competition on these bigger issues, but we will continue to have competitive advantages in the Portuguese capital market. There are a lot of second-tier issuers who don’t need to work with a large global investment bank.”
London, he believes, will be the key to Finantia’s international development, and the firm is strengthening its operations there. It has recently hired Remo Diaseria from BBV Latinvest to head distribution outside Portugal. Meanwhile, Finantia is keeping its eye on opportunities in Brazil and is developing business areas such as trade finance, project finance (where its biggest deal is for a South African toll road) and M&A advisory. One of its biggest projects this year is advising the Portuguese government on the privatization of Portuguese airline TAP, a mandate it won along with Dresdner Kleinwort Benson.
Finantia often teams up with other firms on individual deals but Guerreiro rules out a permanent link-up with a larger institution for now. “We see our capabilities as adequate for us to remain independent,” he says. “The big players often don’t have expertise and contacts at the local level. What we can offer is local knowledge and a niche approach, working with a number of partners on a case-by-case basis. Over time, alliances and link-ups will develop and strengthen naturally.”
The firm already has substantial minority shareholders: French group Natexis owns 15%; SBC – now UBS – has 10%; and the IFC has 9%. But with 30% of the investment bank owned by its managers, notably Guerreiro, Finantia is in a strong position to resist any hostile takeover advances. Whether it can resist competition from larger players remains to be seen. Michael Peterson
BEST BOOKRUNNER, EURO AND GLOBAL BONDS: Merrill Lynch
At a time when big bond deals are getting bigger, Merrill Lynch has been involved in most of the big recent issues. The firm was one of the bookrunners for Freddie Mac’s $5 billion 10-year deal in April and three of Fannie Mae’s $4 billion benchmark deals this year. Being involved in the biggest benchmarks has ensured that the firm has kept its leadership of the market. Over the past 12 months it has arranged deals worth over $100 billion combined, and has acted as bookrunner on 13% of all Euro and global deals, two percentage points ahead of its nearest rivals, Goldman Sachs and JP Morgan.
But Merrill doesn’t focus exclusively on the biggest issuers. “We maintain a presence in an extremely wide variety of markets,” says Paul Richards, the firm’s managing director of global client products investment grade, syndicate and trading. “We want to create as many opportunities as possible for borrowers, as well as for investors.”
The firm remains best known as a dollar lead manager. It has yet to become much involved in the growing trend towards issuance in euros. However, it was joint bookrunner with Goldman Sachs and Paribas on the EIB’s €2 billion ($2.2 billion) issue in March and it was also one of the bookrunners on the Republic of Argentina’s €750 million deal the following month.
But many of Merrill Lynch’s most notable deals over the past 12 months have been globals. The most noteworthy include the $1 billion deal for Philip Morris in July 1997, a deal widely acclaimed as one of the best of last year. The $2 billion global for Canada in February, on which Merrill acted as bookrunner along with CIBC Wood Gundy and JP Morgan, was also well received.
But Merrill really pulled the stops out in March. It arranged a $750 million deal which tapped into a strong patch of demand for 10-year dollars. The pricing was praised as being spot on for a type of company much in vogue. The borrower: Merrill Lynch. Michael Peterson
HIGHLY COMMENDED: JP MORGAN
BEST INTERNATIONAL EQUITY UNDERWRITER: Goldman Sachs
In the international markets, Goldman Sachs is having to work hard to maintain its position as leading equity underwriter. In the past year it underwrote 70 international equity deals with a combined value of almost $20 billion according to Capital Data. That gives it a 16% share of the market. In the same period Morgan Stanley underwrote more issues, 78, but the total value was slightly lower at just under $18 billion.
Goldman’s equity underwriting business is organized along global lines, from New York, London, Hong Kong and Tokyo. Dante Roscini, managing director, co-head of European equity capital markets, emphasizes that the firm has an integrated approach. “It has always been a single operation,” he says. “We take collective ownership of our deals and have a very high level of communication within the organization.”
The firm has been involved in some of the most important equity deals of the past year, including some of the few deals from Asia. In October 1997 Goldman was joint global coordinator and bookrunner on the $4.25 billion IPO for China Telecom, the biggest Asian equity offer to date. Last March it acted as sole bookrunner on the $860 million private placement for Thai Farmers Bank.
But the bulk of the business continues to come from European and US issuers. Roscini highlights the IPO Goldman Sachs underwrote for Heller Financial in April; at just over $1 billion, the biggest US IPO so far this year. Last month the firm was joint global coordinator on the largest ever corporate IPO in Europe, the ffr46 billion ($7.7 billion) issue for the energy and transport company Alstom.
Roscini sees several important sources of new equity in coming years. “In developed markets continued industry restructuring will lead to a growing volume of what we call event-driven issuance,” he says. “In emerging markets, privatization will continue to be the main driver of equity issuance. In the short term it isn’t clear how quickly market sentiment about emerging markets will improve. But in the long term we’re bullish on the growth of the capital markets in emerging countries.”
The key to Goldman’s continuing success in this field, according to Roscini, is that equity is a product integral to the culture of the firm. “People here have a deep knowledge about equity: they think equity and are rewarded for doing so. For us it’s a core product not a commodity. We invest resources in research, we are very innovative, we leverage off our corporate-finance activities and we have a global distribution network and trading capability. Our capital commitment is also important – we stand by our deals.” Michael Peterson
HIGHLY COMMENDED: MORGAN STANLEY
BEST DERIVATIVES HOUSE: BT Alex Brown
By volume, Bankers Trust has long been overtaken by the new giants of this business. Chase tops most tables of derivatives players ranked by their books’ notional principal, closely followed by the new UBS and JP Morgan. Deutsche Bank has made a big push in derivatives and is now part of the global elite.
These volumes drive most surveys of the industry and in most of those – which reflect the views of the banking and broking industry – Chase, Deutsche, JP Morgan and the two partners in the new UBS come top.
But against this tide of volume-based data we pick Bankers Trust for its willingness to create innovative derivatives solutions for the corporate sector and its leadership in many types of equity derivative. Bankers Trust arguably invented equity swaps and continues to lead in that market. The bank concentrates on market-event driven transactions rather than flow business and has been adding to its teams in Europe and Asia. The merger with Alex Brown, a traditional equity broker will help reinforce this.
We also pick Bankers Trust because it is still regarded by both non-financial customers and its peers as a leader in structured derivatives solutions and non-vanilla instruments. This is a remarkable achievement given the events of 1995, events that were to cost the bank its chairman, his successor and its brightest derivatives star. Climbing back from that nadir has been tough and has taken most of the last three years. But the bank is still a pioneer in the analysis of derivatives risk with its Raroc 2020 model and it is still a force to be reckoned with in tailoring solutions to the results of that analysis for its clients.
Whether it can continue to succeed in a market increasingly dominated by giants – and, in the case of the new UBS, aggressively innovative giants – remains to be seen. Simon Brady
HIGHLY COMMENDED: CITIBANK
BEST RISK ADVISER: Bankers Trust
Most banks want to do more business with growth companies. Bankers Trust is going one better: it is spawning its own high-tech start-ups. That’s because one of its niche activities, risk management advisory, is starting to look more and more like the software business.
Risk advisory is a fairly young market. As banks and corporates started to become aware of the different kinds of risks they faced, they began to call in specialists to tell them how their credit, operational or foreign-exchange risks correlated and how their future earnings could be affected. Usually, the risk advisers would sell their clients a way of hedging their risks. “Our business started as risk identification,” says Martin Nance, head of Bankers Trust’s risk-management advisory group in New York. “Then it became risk measurement. Now we’re providing solutions to manage those risks.”
Often, the best way to measure complex risk is with a computer model. Sometimes that requires tailor-made software. In the past six months, for example, Bankers Trust has begun to market Default Filter, one of a number of products now avaible to measure credit risk. This one is specifically designed to predict which of an emerging-market bank’s customers will default. “Banks in south-east Asia are using it to identify weak credits, establish reserves – even to select customers,” says Kevin Ferrell, global head of the risk-management advisory group at Bankers Trust. “One of our clients is a south-east Asian central bank which is using it to establish a national credit bureau.”
Default Filter requires a lot of input from Bankers Trust risk advisers after the model has been sold. Some of the firm’s other solutions to risk-management problems are straightforward off-the-shelf computer products. So what is a bank doing designing and marketing software? That is a question that some of Bankers Trust’s senior managers – and software programmers – have obviously been asking. In April IQ Financial Systems was spun off as a separate company to market products including Remos, a forex deal-management system; LoanIQ, a product to help manage commercial loan portfolios; and RiskIQ, a risk management system previous known as XRM.
Ferrell explains the thinking behind the decision to spin off IQ Financial Systems. “We want to put this business on the same footing as its competitors in the software market. Also, Bankers Trust places great importance on innovation. If some of our people develop a good idea we like to turn them into a venture entity. We want them exposed to the same environment – and give them the same chance of reward – as their counterparts at other venture companies. It also gives us a chance to bring in third-party investors who act as a good discipline for us.” IQ Financial is not the first such spin-off. Zoologic has been operating on its own for three years offering risk-management training to clients including the Bank of England.
But the traditional side of risk advisory remains important. Ferrell estimates the split between implementable products (software and models) and the consultancy-oriented services at about 50:50, but sees that shifting to 70% implementable products and 30% old-fashioned advisory.
Nance is particularly enthusiastic about the advice the firm can offer companies in industries experiencing deregulation. “We have a major west-coast utility as a client,” he explains. “As part of their new regulatory environment they were told they won’t be able to charge more than x for their power. Because they don’t know how much it will cost them to generate power in future they face a massive risk. There is no developed liquid market for electricity so they can’t simply go out and hedge that exposure.” The solution Bankers Trust found was to develop a hedge based around the price of gas, the most volatile element of the energy price.
Utilities companies also need a proxy for future energy prices when they sell assets. At present the US utilities sector is undergoing a big transformation. Regional generation and transmission companies are consolidating nationally. Valuing future incomes from energy is an important part of that process.
The other big change in Bankers Trust’s risk-advisory business is that the typical client is different. The biggest customer for these services used to be fellow banks. Now corporates account for the lion’s share of the work as banks have developed their own sophisticated in-house risk-measurement departments.
Some of the most sophisticated of these corporate customers are in emerging markets. “Corporates in markets such as Mexico, Brazil and Argentina are often ahead of those in the US in addressing risk,” says Nance. “Latin American companies have seen much more volatility and how it affects their business. North American companies operate in a more stable environment.”
This remains a niche business for banks. But Bankers Trust faces no shortage of competitors. In addition to banks such as JP Morgan, Credit Suisse and Goldman Sachs, there is growing competition from consulting firms including Arthur Andersen and McKinsey. But as risk-advisory software becomes ever more important, how long will it be before Microsoft tries to muscle in on this market? Michael Peterson
HIGHLY COMMENDED: JP MORGAN
BEST FOREIGN-EXCHANGE BANK: Citibank
For as long as anyone can remember, Citibank has been the world’s biggest forex dealer. Ask Citibankers why the firm is so far ahead and they will tell you about the quality of service they provide, the bank’s global coverage and its long history in the market.
But that doesn’t explain why no other bank has ever been able to knock Citi off its perch – not even for a short period. There is simply no other significant area of finance where one institution has been dominant for so long. Euromoney has been polling forex customers about their choice of dealers since 1979. Citibank has come top in every one of our annual polls. The bank claims more than double the forex revenue of its nearest rivals. In 1997 its revenue from forex trading was $1.3 billion, up from $926 million in 1996 (an unusually bad year).
Citibank has some areas of relative weakness, French francs and sterling/ Deutschmark trades for example, but there are few currencies for which it is not one of the top dealers, if not the dominant player.
It is especially strong in smaller and emerging-market currencies and that is a reflection of its position as the world’s most international bank, with a presence in far more countries than any rival.
Through thick and thin
The truth is that Citibank has seen forex as a core business – it accounts for 15% of corporate-banking revenues – for a long time, and it has kept its eye on the ball. Citi has been in the business since 1897 and has stuck with it through the dull years of the US depression and the gold standard.
But as in any other market, the leader needs to work hard and adapt to stay ahead. And the forex market is heading for some big changes. The introduction of a new world currency from January 1999 is only part of it. Richard Moore, UK head of foreign exchange at Citibank, believes his firm can anticipate market developments. “Notwithstanding the introduction of the euro, demand for foreign exchange continues to rise,” he says. “This trend is driven by growth in both world trade and by investment funds being increasingly willing to move cross border to diversify risk and enhance returns.” But those developments mean that customers’ needs are changing. “As clients’ forex needs become more sophisticated so the demand for the more complex forex option products continues to rise,” says Moore.
Perhaps the biggest threat to established players such as Citibank is electronic forex settlement. Already, clients can use on-line services to discover prices. Soon, they should be able to use technology – perhaps the internet, perhaps proprietary networks – to find counterparties and carry out trades. For big currencies that might bypass forex dealers altogether. In other sectors, already thin margins will be squeezed.
HIGHLY COMMENDED: DEUTSCHE BANK
Deutsche has made the most convincing challenge to Citibank’s dominance of the forex market of recent years. In 1995 it ranked 22 in our annual poll. By 1997 it had moved up to fourth place and this year is ranked second. Its forex revenues have increased from Dm591 million ($336 million) in 1996 to Dm916 million last year. In the first quarter of this year Deutsche generated forex revenues of Dm353, up 41% on the previous year.
Deutsche’s expansion has surely not come cheap. The firm has hired some top names in the forex market, notably former Citibanker Michael De Sa, and has also invested in building infrastructure. But it is now working hard to avoid becoming stuck in a commodity business by positioning itself as a forex consultancy. The firm believes it now equals or beats the best – that is, Citibank – in terms of overall return on capital, equity and revenues divided by employee. Michael Peterson
BEST AT SYNDICATED LOANS: Chase
Peter Gleysteen is keen not to sound too hubristic. Chase’s global head of syndicated finance thinks his bank will have to work hard to stay on top of the syndicated loans market. But for now he doesn’t see any serious rivals. “If you break down the market by product type, geography and industry there are about 40 segments,” he says. “And Chase is number one in about 35. We’re number two in the others.”
According to Capital Data, Chase has arranged twice as many syndicated loans in the past 12 months as its nearest rivals, Citibank and JP Morgan, giving it a market share of nearly 15%. But Gleysteen points out that this analysis understates Chase’s dominance of the market. “We are the bookrunner on over 80% of the deals we arrange,” he says.
But how important is volume in the syndicated loans market? “A couple of years ago it was certainly true that the business was becoming somewhat commoditized for highly rated borrowers,” says Gleysteen. “Margins reached historic lows. But this is a cyclical business. This year it’s very different. We are also seeing a lot more higher-margin business such as financing for mergers and acquisitions.”
Over the past couple of months, for example, Chase has arranged a $2.7 billion loan for motor-parts supplier Federal Mogul to buy the UK’s T&N. “This was a growing non-investment-grade company (even before the acquisition) making a cross-border, all-debt-financed cash offer for a UK-listed company in a certain-funds transaction as required in a UK tender,” says Gleysteen. “The deal was oversubscribed.” Another oversubscribed deal was to finance Texas Utilities’ $11.2 billion bid for the UK’s Energy Group, a widely syndicated deal which closed last month.
As M&A becomes more important, borrowers are looking increasingly for a bank to be a one-stop shop, to act as M&A adviser and arranger of both bonds and loans. Does that give an edge to those investment banks that are working to build their share of the syndicated loans market? “You have to have the lending capability, or being a one-stop doesn’t mean anything,” says Gleysteen.
HIGHLY COMMENDED: BARCLAYS CAPITAL
While Chase remains the behemoth of the business in global terms, Barclays has increased its market share over the past couple of years to become clearest challenger in Europe. Tim Ritchie, global head of syndications and loan distribution at Barclays Capital, points out that his bank has topped the Capital Data league tables in Europe since 1996 and is ahead by a healthy margin in 1998.
This has happened in increasingly difficult times for the syndicated loan market. Many Japanese banks, and some from continental Europe, have held back from the market. That has pushed up margins for investors, but arrangers’ fees have not benefited. “The market has become more difficult for underwriters to read,” says Ritchie. “Borrowers realize the importance of the quality of execution which experienced arrangers like Barclays Capital deliver.”
The bank has arranged some innovative deals lately. Ritchie highlights the February £1.6 billion ($2.6 billion) loan Barclays arranged along with Merrill Lynch for Great Universal Stores to buy fellow UK retailer Argos. In May Barclays was sole arranger and underwriter on the fls3.4 billion ($1.7 billion) facility to finance the acquisition of Kappa Packaging by two financial buyers, Cinven and CVC. This deal, the largest LBO in Europe, will result in the largest high-yield bond issue in a European currency.
The disposal of Barclays’ equities business has allowed the firm to sharpen its focus as a pure debt operation. “The convergence of the loans and debt markets has begun,” says Ritchie. He talks to his bond origination colleagues on a daily basis, and his department is located next to the high-yield and asset-securitization businesses. “The flexibility of the loan product will remain an advantage,” he says. “At Barclays Capital we look to tailor the most appropriate solution from the client’s perspective using the most efficient product mix.” Michael Peterson
BEST AT PROJECT FINANCE: Chase
Things take a long time to happen in project finance. Deals can take months to put together and the projects themselves may take years to complete. Project financiers have to take a longer view than their more flighty colleagues in other departments. Certainly, there are few other areas of finance where a $450 million loan for an undertaking in Indonesia would be seen as a promising deal this year.
But the Corridor Block Gas Project, signed in February last year, could be a big money-spinner for the foreign energy consortium developing this Sumatra gas field. The project could also be a hard-currency lifeline for Indonesia when it is finished later this year. Rick Edwards, global head of project finance and advisory at Chase, which was an arranger on the project financing, points to the deal as one he is particularly proud of.
Chase is comfortably ahead in the market for project finance. In the past 12 months the bank has arranged 76 deals worth some $16 billion. According to CapitalData its market share is 14%, more than double that of its nearest challenger, Citibank.
Edwards is still looking at deals in Asia. He takes time out on a visit to Vietnam to speak to Euromoney. A veteran globetrotter, he has recently moved back to the US after a six-year stint in London and two years in Asia. The return to head office is because Chase is now organizing its project-finance business along global lines from New York.
Inevitably, some emphasis is shifting from Asia to other emerging markets, particularly Latin America and the Middle East. One of the biggest deals of recent years has been the $2.3 billion Yanpet II petrochemical project in Saudi Arabia which closed late last year.
There are also deals to be done in developed countries – or even above them. Last December Chase and Barclays arranged finance for Iridium, a joint venture between Motorola and Sprint which is sending communications satellites into orbit. The $1 billion deal was split between a revolving credit and a term loan.
The project-finance market is changing – slowly. A few years ago, most deals were limited-recourse bank financings. Now leasing and project bonds are becoming more important. “What we can offer is one-stop sourcing,” says Edwards. “We can take advantage of market timing and flexibility by offering a full range of capital sourcing for the same project.”
How will Chase keep its dominant position in the project-finance market? “You have to be smart about selecting the projects with the greatest economic value,” says Edwards. “And you need to have instant access to various markets for multi-sourcing deal capital.” Michael Peterson
BEST EMERGING MARKET BANK: Citibank
Citibank was deeply entrenched in the emerging markets long before the term became fashionable. Its great advantage is a presence and brand name so strong that nationals everywhere regard it as a local institution. The strength of retail operations means that Citbank can avoid accusations of being a fair-weather friend that is often leveled at foreign corporate banks.
This past year has seen some very rough weather in emerging markets but Citibank has remained committed. In Asia, for example, it has branches in 28 countries. As well as servicing global multinationals operating there, the bank has also been developing relationships with local Asian companies, often including the up-and-coming medium-size groups as well as the region’s top names.
According to a senior executive with Citibank in Hong Kong, one important factor in the bank’s regional strategy has been “the variety that we can deliver: from securitization, leasing and 144a bonds to Islamic and project finance and derivative solutions. We are present in every country with no more or less emphasis on one than any other. We support our clients where they want to do business”.
For the third year in a row Citibank was a lead on an international bond issue by Philippines Long Distance Telecommunications. It was an arranger of an $850 million acquisition term loan to finance the takeover of Consolidated Electric Power Asia by Southern Company of the US; and Citibank Labuan signed a $100 million Murabaha Islamic credit facility for Malaysia Airlines.
Not a quitter
The recent downturn in some Asian markets will force a number of banks to cut back their services in the region. Corporates should not expect Citibank to be among them. “Our long-term strategy will remain in place,” says one Citbank executive.
In central and eastern Europe, Citibank has 13 branches in six countries and plans to continue its expansion. Last year in the Czech Republic it underwrote and placed an aggressively priced and structured $400 million multi-currency revolver for EuroTel, the country’s premier mobile telephone operator.Last October in Hungary, Citibank co-arranged the first ever local-currency, open market syndicated loan for Matav, the telecom company ($50 million equivalent) – a deal that should become a benchmark for future deals. And in Poland the bank won the lead role for a long term financing for PTC, a start-up telephone operator.
Citbank operates in 26 countries and territories in Latin America and the Caribbean. The oldest foreign bank in the region, Citibank’s Buenos Aires branch opened in 1914 and was the first branch of an American bank outside the US. Among major deals completed over the past year was a corporate finance deal to fund a $35 billion project for the construction of a 160 kilometre toll road running from Col Oviedo to Ciudad del Este. In Venezuela Citibank served as financial advisor for a project financing for Petrozuata and co-arranger for a $1 billion 144a bond underwriting. Brian Caplen
HIGHLY RECOMMENDED: ABN AMRO
BEST GOVERNMENT BOND TRADING HOUSE: Merrill Lynch
With the US and the countries of euroland continuing to reduce government borrowing, the onus has been on government bond traders to keep up. Merrill Lynch had an excellent starting point: until the mid-1990s it had a very small government trading desk, especially in Europe. And in recent years with Emu drawing closer, the low-margin, high-volume nature of government-bond trading became more pronounced as rates and spreads converged.
But trading in government bonds was essential to the growth of the rest of the business, says Richard Huston, managing director and head of European government-bond trading. “In Europe still, 75% to 80% of assets bought in Europe are liquidity products, such as foreign exchange and government bonds. And there are many clients who will not deal with you on other products if you can’t execute such trades on their behalf.”
Merrill started to reorganize its government bond trading division two years ago. “We were decentralized in Europe,” says Huston. “But we did not have the sizeable operations other firms had in various European centres, and so were able to centralize some of our trading operations more easily 18 months ago.” If anything, Merrill’s government-bond trading desk was still slightly under-resourced, but this has allowed it to adapt more quickly to the major developments in government-bond markets: the drop in issuance from western states, monetary union, and the growth in issuance from emerging markets.Huston regards the drop in issuance from western states as a big opportunity. “Certainly we are unlikely to see the volume of issuance we got in the first few years of the decade, but we now have much more experience. Look at the high number of credit and derivative products in the US market, and that is now spreading to Europe.” Products such as zero coupons, stripping and US-style auctions are also being used more widely in Europe.
The key hurdle in government-bond trading, as with other products, is technology. “Using technology for price discovery in trading government bonds will free up more of us to concentrate on adding value to the service we offer,” says Huston. With a large worldwide network of traders, and its formidable reputation in the debt markets, Merrill will be hoping that adopting the right technology will keep it at the top of the heap. Antony Currie
BEST EUROBOND TRADING HOUSE: Warburg Dillon Read
Stephen West, managing director at Warburg Dillon Read, is somewhat uncomfortable with the idea of his firm as a Eurobond trading house. “We only think about credit,” he says. “We trade securities and loans together and we have a single global platform for all risk.”
Traders specialize in currency sectors or products. There are, for example, seven traders of euro-zone products, three dollar-sector specialists and one yen trader. But no-one deals exclusively with Eurobonds. “The only distinction we make is between government and non-government credits,” explains managing director Manfred Schepers.
But investors and peers continue to rate the firm as a market maker in Eurobonds. Our bond trading poll (Euromoney, May) ranked Warburg Dillon Read as the best overall trader of Eurobonds. The firm’s strength in credit research is confirmed by its overall first place in our May poll on credit research, the first comprehensive survey of investors’ views on banks’ credit research services.
Other firms are also trying to establish themselves as traders of credit rather than of bonds but SBC reckons it’s ahead of the game. “We hedge all directional risk,” says West. “Our traders are perfectly capable of seeing that the treasury market is moving, but we don’t want them distracted by constantly looking at those levels. We want them to focus all their attention on credit.”
A lot of the pressure for change is coming from investors, and the shift in investors’ thinking has been abrupt. A year ago most were building their portfolios on a geographical basis. Now they are thinking increasingly in terms of sectors and credit. “We are helping a lot of investors create a true credit portfolio for the first time,” says West. “We can show them how to compare the risk of a US high-yield bond with an emerging-market security such as a Russian GKO hedged into dollars.”
The arrival of the euro is not going to bring any immediate changes. Traders will continue to specialize in the same products. “In January a Pfandbrief trader won’t suddenly start trading Italian securities just because they are denominated in the same currency,” says Schepers.
Michael Peterson
BEST MERGERS AND ACQUISITIONS ADVISER: Goldman Sachs
There is no shortage of M&A advisory work at the moment. Mergers and acquisitions worth over $1 trillion have been agreed already this year and plenty of investment banks are doing good business.
But Goldman Sachs remains the big player in this market. Securities Data calculates that the firm has worked on deals worth a combined $527 billion in 1998. That gives it a 41% share of this market. When they are thinking about doing a deal – and especially when they receive a hostile offer – Goldman Sachs is the first investment bank many CEOs call.
It helps that many of the biggest deals of the past year are mergers in the US, which remains Goldman’s strongest market. The firm has, for example, been heavily involved in the latest round of consolidation in US banking – as an adviser if not yet as a player. It advised BankAmerica on its $133 billion merger with NationsBank, First Chicago on its $72 billion merger with BancOne and Mellon Bank on defending the hostile bid it received from Bank of New York.
But the firm is also winning big mandates in Europe. Last month it advised Sweden’s Stora on its proposed merger with Finland’s Enso to form a pulp and paper group worth $8.5 billion. It also worked with Générale de Banque on its proposed merger with Fortis and the subsequent counter-offer the Belgian bank received from ABN Amro.
The firm is particularly proud of its role in the merger negotiations between Daimler-Benz and Chrysler. Goldman Sachs advised the German car maker on this $62 billion deal, which may herald a future wave of transatlantic mergers.
Inevitably, not every deal it is involved with is a clear success. Goldman Sachs may, for example, be happy to forget the work it did last year advising Barclays on the sale of its equities business. Its role in PacifiCorp’s aborted takeover of Energy Group has also left it open to criticism (see Goldman’s odd loss of Energy, page 29). But as the M&A house most banks choose to work with, Goldman can hope to reap the profits for as long as the consolidation of the global banking industry continues. Michael Peterson
HIGHLY COMMENDED: CREDIT SUISSE FIRST BOSTON
BEST AT EURO AND NON-DOLLAR COMMERCIAL PAPER: Citibank
These are not happy times in the Euro-commercial paper (ECP) business. Some firms are quietly downgrading their ECP operations and spreads are at an all-time low. Increasingly, this is becoming a market for specialists. Citibank, which trades $30 billion of short-term money-market instruments a month, is one of the few which makes money. “We hold our heads above water,” says Colin Withers, vice-president and head of ECP and Euro-MTNs at Citibank. According to Capital Data, Citibank has a 26% share of the ECP market, making it the market leader by a big margin.
As yield curves have flattened for all major currencies, spreads have fallen. Spreads on short-term money-market instruments as a whole are less than two basis points, says Withers. Spreads in the international market have even fallen further than in the much bigger and more liquid US domestic CP market, where spreads are now around five basis points.
Citibank’s money-market business is organized into three hubs, one based in New York, one in London and an Asian centre which is currently in Hong Kong. In addition to originating and trading international CP, Citibank is working hard to develop new domestic markets. “If a big consumer products company has a need for, say, zloties, it might make more sense for them to raise it locally in Poland than for them to buy it on the forex market,” says Withers. “We can help them do that.”
Citibank owes much of its strength in ECP to its strong corporate relationships. Indeed, the business goes hand in hand with foreign exchange and the dynamics of the two markets are closely related. “The way short-term funds are managed in future is likely to become a lot more scientific,” says Withers. “That will create opportunities.” Michael Peterson
HIGHLY COMMENDED: DEUTSCHE BANK
BEST AT MTNS: Deutsche Bank
“Buying into the market has certainly not been part of our strategy,” says Tiina Lee, head of Euro-MTNs at Deutsche Bank. Lee, who has led Deutsche’s rapid advance in Euro-MTNs over the past year, claims that all the new business has been profitable and that revenues are comfortably ahead of forecasts.
Deutsche has moved quickly up the rankings to challenge Merrill Lynch’s long-standing leadership of the Euro-MTN market. According to Capital Net, Deutsche Bank arranged non-syndicated issues worth $6.9 billion in 1997, giving it fourth place behind Merrill (on $11.6 billion), UBS and Morgan Stanley. But in the first five months of 1998, Deutsche has overtaken Merrill on volume, with non-syndicated issues worth $5.5 billion against Merrill’s $4.7 billion. The US firm remains ahead in terms of number of issues this year: 210 compared with Deutsche’s 164.
The emergence of Deutsche as a key MTN player owes a lot to Lee. She joined the bank from Lehman Brothers in May 1997 and heads a team consisting of two traders in London, two in Tokyo and one in Frankfurt. The business forms part of managing director Ron Tanemura’s new global credit derivatives group, which also includes asset swaps, credit derivatives and repackagings.
A big element of Deutsche’s MTN expansion strategy has been to educate its sales people. “Given the size of Deutsche’s sales force that was no small task,” says Lee. “In the first three to six months we spent a lot of time talking to our sales people about EMTNs. And now they are very aware of our products and they bring in a lot of enquiries.”
Deutsche’s pioneering deals have included the first quasi-public credit-linked note – a 30-year Argentina-linked zero-coupon issue for SEK – as well as some of the first synthetic Hungarian forint, zloty, rouble and rupee EMTNs. So far this year it has done trades in 14 currencies with issuers from 22 countries.
Robert Mohamed, head of transactions management, believes the integration of the trading staff with his team of eight which put together the arrangerships is what sets Deutsche’s MTN business apart from rival operations.
Three or four years ago Deutsche had no more than four or five arrangerships. By the end of last year it had 13. At the end of March the South African conglomerate Transnet signed up with Deutsche after a bitterly fought contest with rival MTN houses. Last month the Norwegian multimedia group Orkla signed a global programme.
Despite Deutsche’s apparent retreat from other areas of investment banking, Lee believes it is in EMTNs for the long term. “Before I joined Deutsche I was always surprised that they weren’t more involved in MTNs,” she says. “Deutsche has all the components that go to make for a good MTN house. First, it has the credit rating to be able to provide the swaps for issuers. Second, it has excellent distribution. Third it has good relationships. And fourth, it has a strong balance sheet.”
She believes that other strong continental European banks are likely to emulate Deutsche in building an MTN business, but that few have comparable distribution capability. For the time being the market will continue to be dominated by US investment banks along with Deutsche.
Michael Peterson
HIGHLY COMMENDED: MERRILL LYNCH
BEST EQUITY-LINKED HOUSE: Merrill Lynch
Merrill Lynch has a strong claim to be the world’s pre-eminent convertibles specialist. It is the leading arranger of convertibles in the US domestic market, the market leader worldwide and has arranged deals on behalf of issuers in North America, Europe, Asia and Australia in the past 12 months.
Unlike some of its rivals, which treat convertibles as part of their fixed-income business, Merrill Lynch has a dedicated equity-linked operation run on a worldwide basis. Convertible sales are part of the global equity-linked products group, headed by Sergio Ermotti in London and Joe Argilagos in New York, which sells both convertibles and equity derivatives. Origination is run as a joint venture between that group and the global equity capital-markets division. Merrill can claim a total of 60 full-time professionals dedicated to sales, trading and research for convertible issues.
It makes sense to run convertibles as an international operation: volume of issuance in any one market tends to be cyclical. At the moment, for example, Asian issuers have gone quiet. “This is a market that works well in difficult times,” says Farley Bolwell, head of international equity-linked origination at Merrill Lynch. “But Asian companies are finding it difficult to raise any sort of capital at the moment. We are not seeing the same number of convertibles issues from Asia as in the past.”
Euromarket issuance has grown strongly over the past couple of years, from $6.7 billion in 1995 to nearly $25 billion last year. Warburg Dillon Read has the biggest share of this sector, but Bolwell believes that issuers see Merrill as the prime innovator in the market. “We have a solution-driven perspective,” he says, “and the majority of convertible issues we lead use non-traditional structures. We rarely bring a plain-vanilla financing.”
Recent innovations include last month’s $1.4 billion 10-year zero-coupon deal for STMicroelectronics, the first equity-linked product listed in both the US and France (the two tranches fully fungible). Bolwell highlights another deal he is particularly proud of from last year, a dual-currency zloty-Deutschmark convertible for Poland’s Elektrim. The issue was designed to offer the issuer a tax-efficient structure while giving investors exposure to an emerging-market issuer without currency risk.
Bolwell believes the search for tax-efficient structures will be a key driver of the market in coming years. Another will be the growing awareness among companies of the importance of shareholder value. That’s because convertibles are less immediately dilutive than straight equity issues. There is a growing trend, for example, for companies to buy back equity and issue convertibles. “Issuers will want to broaden their shareholder base and keep equity values high in an M&A-driven environment,” says Bolwell. “That will continue to make convertible issues attractive.” Michael Peterson
RUNNER UP: WARBURG DILLON READ
BEST UNDERWRITER OF EMERGING-MARKET DEBT: Goldman Sachs
Although Chip Selig is formally managing director for emerging markets at Goldman Sachs, he’d rather not use the term emerging markets. For one thing, he says, it suggests Goldman treats them differently to more established markets. “The way we look at it is that the ability to win mandates in different economies is just that. We think of them not as emerging markets but as trade zones where clients want to raise money and investors want to invest.”
Nonetheless, it is the countries pigeonholed as emerging markets that have been at the centre of the Asian crisis, or directly affected by it. Goldman has managed to raise international debt for two of these in recent months. The first was the debut issue, for a total of $4 billion, for the Republic of Korea, for which Goldman was joint lead manager with Salomon Smith Barney. Launched at the end of the first week of April, the deal was an integral part of the rescue package put together after the IMF stepped in to assist in restructuring Korea’s economy at the end of 1997.
And at the beginning of June Goldman was sole bookrunner on a $1.25 billion issue for the Russian Federation. Although by no means a first, there could not have been a worse environment for the deal: Russia’s economy and financial integrity was again under attack, the rouble had been spiralling downwards, and domestic interest rates had trebled, all in the previous two weeks. What’s more, this was the first deal on behalf of the Federation for which Goldman was bookrunner.
It wasn’t Goldman’s first foray into Russia. With Glenn Earle, the managing director in charge of Goldman’s expansion into eastern Europe, at the helm, the US investment bank has been active in winning mandates – first from Alfa Bank last July, for a $175 million Eurobond, and in securing with ABN Amro a mandate for a convertible bond and plain-vanilla Eurobond for Gazprom, Russia’s largest company. (The Gazprom deals were postponed because of market volatility following the Asian crisis.)
Goldman has also been active in Latin America, and not just with Pemex, the Mexican petroleum company that has been a frequent issuer of international debt for some time. In March this year Selig worked on Brazil’s $500 million deal, which Goldman jointly led with JP Morgan, and last September was joint bookrunner with Chase for Venezuela’s $4 billion deal.
Some might be surprised that Goldman is so successfully breaking into emerging-market debt underwriting. But it is unlikely to be a one-year wonder: the firm has a successful history of bringing sovereign issuers to the markets. Now that western governments are cutting back on size and frequency of deals and emerging markets look to issue more, the bank is well placed to reap the rewards. Antony Currie
BEST DOMESTIC BANK IN AN EMERGING MARKET: Banco Itaú
Emerging markets are noted for volatility and the past year has shown just how traumatic things can be when financial systems are not in top condition. Fortunately, Brazil’s is in good shape and there are plenty of reasons for choosing the lead bank Banco Itaú as best domestic bank in an emerging market.
The challenge for any Brazilian bank is to yield high returns while maintaining a comfortable capital cushion in case of crisis. By quick adaptation to new circumstances such as the low inflation environment in Brazil, Itaú has managed to achieve this. “We have high profits, high reserves, high expenses, high returns on equity. This is the situation south of the Equator,” says senior vice president of Itaú.
Itaú was the first Brazilian bank to introduce service charges to compensate for the loss of float revenue after inflation came down – a controversial move at the time that generated some bad publicity. Itaú has also shown the way in acquiring and turning round run-down state banks with its purchase and successful transformation of Banerj, the Rio de Janeiro state bank. The big question now is whether Itaú will buy São Paulo state bank Banespa which would make it Brazil’s largest private bank. Currently Itaú is the second largest after Bradesco.
A large contributor to Itaú’s success has been its tough internal culture in which senior executives, many of them trained engineers, have constructed myriad performance measures. “Our vision is to be the leader in performance,” says Itaú president Roberto Setubal. “We don’t want to be the biggest but the best. We love [quantitative analysis] and we know how to use it.”
On the investment banking side Itaú has a joint venture with Bankers Trust and it has overseas operations in Cayman Islands and Luxembourg.
HIGHLY COMMENDED: UNEXIM
Russia’s largest private bank has been described as the country’s JP Morgan or Deutsche Bank for its blue-blooded culture. It was founded and is run by the same people who would have been the administrative elite under the old Soviet Union. In a country where banking can be a little on the wild side, Unexim has taken great strides making its operations more professional. It is moving ahead on all fronts including building up stakes in industry, such as its holding of Norilsk Nickel, the world’s largest nickel producer, and in Sidanko, a group of oil companies. Investment banking is expanding through MFK Renaissance.
Said founder and top executive Vladimir Potanin in an interview with Euromoney last year: “I think that within five or 10 years Unexim will [consolidate its position] as one of the biggest financial institutions in Russia and place itself among the 100 biggest banks in the world.”
Brian Caplen
BEST EURO CAPITAL MARKETS BANK: Paribas
Paribas’ focus on the single European currency, stresses Cyrus Ardalan, the firm’s global head of fixed-income marketing, is not a recent phenomenon. “We have viewed ourselves as a pan-European institution from the earliest days,” he says. “Although we’re very strong in the French domestic market we have never relied solely on it.” In the early 1990s Paribas was the leader in Ecu issuance before disaster struck the European monetary system with the devaluation of lira and sterling in 1992.
Through the dark days of the mid-1990s Paribas kept faith with monetary union. Now it has started to reap the benefits. The EIB launched the currency in January 1997 with its first euro-tributary bond. A handful of sovereigns and other big borrowers followed suit during 1997, issuing what were increasingly being marketed as euro-denominated bonds. Mexico became the first emerging-market issuer in euros in September last year.
But it was in 1998 that the fashion for borrowing in euros really began to gather momentum. In February deals from Brazil and Abbey National were quickly followed by the biggest euro bond so far, the republic of Italy’s 10-year deal for €4 billion ($4.5 billion). In April Paribas also co-led with Morgan Stanley the jumbo €17 billion exchange offer for the republic of France.
Almost every big deal in the new European currency has involved Paribas. Not a bad record for a firm that has long been a minor player in the international bond market. And with euro or Ecu issuance worth €33 billion so far this year, this is no longer merely a niche market.
The main aim now for Paribas and other firms involved in the market is to persuade corporates to do euro deals. “Now that momentum has built up on sovereign paper we are pushing like crazy on corporates,” says Andrew Pisker, global head of Paribas’ bond business. “And lots of them are interested.”
But the key question is whether Paribas’ name in the euro market will translate into market share in the single capital market when it becomes reality and the beginning of 1999. For all the fanfare, only a minority of issuers have issued in euros. Will those who have continued to issue in, say, Deutschmarks change their choice of lead managers when their bonds are denominated in euros?
Ardalan replies that Paribas should be their natural choice, and not just because of the headline deals it has done for issuers such as the republic of Italy. “If you look at all issuance – both domestic and Eurobond – for the euro 11 currencies that will make up the euro [excluding Pfandbriefe], we are currently the number-one underwriter.” he says.
There are plenty of rivals who remain sceptical about Paribas’ prospects in the single currency area. But for now Paribas is enjoying the fact that issuers and investors identify it so closely with the euro sector. “Our reputation has definitely grown over the past year,” says Ardalan. “We are viewed as the market leader and we are increasingly being approached by issuers directly. It’s a good position to be in.”Michael Peterson
BEST AT BRINGING NEW ISSUERS: Credit Suisse First Boston
All the top Eurobond originators feel that introducing new issuers to the market is one of their strengths. But there is little data to show how firms compare in this area. Using Capital Data’s Bondware database Euromoney found that 423 issuers that had not been in the market since 1980 launched international bonds over the past 12 months.
Analysis of the lead-managers chosen shows that new issuers are attracted to the market’s most established names. Credit Suisse First Boston has arranged the greatest number of issues in the past year. It led 30 of these new issues, some way ahead of Morgan Stanley (with 21) and three firms, Merrill Lynch, JP Morgan and Warburg Dillon Read, which each arranged 17. CSFB’s achievement no doubt reflects its heritage in the Euromarkets as well as the work it continues to do to attract a variety of borrowers to the markets.
Simon Meadows, global head of syndicate at CSFB, agrees that bringing new issuers is one of the firm’s strengths. “We take pride in appealing to a diversity of borrowers,” he says. “It reflects the broad coverage CSFB has with investors around the world.”
Meadows picks out two debut deals which illustrate this diversity. The firm led Costa Rica’s debut five-year Eurobond earlier this April. “It was not a big deal, only $200 million, but it performed incredibly well,”
Caterpillar was a very different kind of newcomer to the international bond markets. The US engineering company is well known, but there was a lot of work to do to educate investors about the credit and the fact that there were two separate issuers, Caterpillar Inc, with a three-year deal for $250 million, and Caterpillar Financial Services, which also issued a $250 million bond, but with a five-year maturity. “One of the things that helped to clinch the Caterpillar deal for us was our traditional strength in selling US borrowers into Europe, especially the UK and Switzerland,” says Meadows. Michael Peterson
BEST CORPORATE BOND HOUSE: Merrill Lynch
Merrill Lynch has acted as bookrunner on 74 of the 908 corporate bond deals done over the past 12 months according to Capital Data. Of the biggest 25 issues, the firm was involved as bookrunner on six. Its closest rivals are Goldman Sachs, who ran the books on 62 corporate deals and Morgan Stanley who did 57.
The firm sees corporate issuance as a key strength. “Companies know that we have unparalleled experience in the US corporate bond market, and we also have excellent research capabilities,” says managing director Paul Richards. “There is no doubt that margins on big supranational and sovereign deals are decreasing. Arranging deals for corporates can be more profitable, due to the additional risk involved, provided you have the ability to understand that risk and market accordingly.”
This year, Merrill has acted as joint bookrunner on landmark corporate deals including Sony’s $1.5 billion global in February and Cable & Wireless Communication’s debut yankee deal for $1.8 billion in March.
Niall Cameron, director and head of global syndicate, highlights a smaller deal, the $750 million deal for Ameritech, as one he is particularly proud of. This five-year debut Eurobond, arranged by Merrill and ABN Amro, came to the market in February at a spread of 46 basis points.
Arranging corporate bonds may be more profitable than other areas of Merrill’s origination business, but it also takes more work. “New corporates tend to need a greater degree of hand-holding,” says Cameron. “They will be typically less frequent issuers, coming to the market no more than once or twice a year. We need a lot more work on the research side and new names have to do roadshows. They usually have a strong desire for their deals to be perceived well.”
Issuance by European companies will increase following the introduction of the euro. But Cameron doesn’t expect a rapid shift away from bank borrowing. “We will not move to the US model overnight,” he says. “There will be disintermediation, but bank borrowing will continue to make sense for many companies.” Michael Peterson
BEST SOVEREIGN BOND HOUSE: Goldman Sachs
By volume Goldman Sachs has been the top sovereign bond arranger for the past 12 months. The quality of its deals also stands out. Brace Young, the bank’s head of European debt capital markets, highlights May’s $2 billion 10-year issue by Italy, led by Goldman and Lehman Brothers. Another sovereign issue the firm is particularly proud to have lead-managed is last month’s $1.25 billion five-year deal for the Russian Federation.
A notable deal last year was Venezuela’s $4 billion issue in September which was led by Chase and Goldman. This was the biggest issue by an emerging-market government since Mexico’s $5.4 billion floating-rate note in 1996 and market players were surprised by the amount Venezuela was able to raise. The spread, at 325 basis points, looks good in the light of this year’s spread-widening for emerging-market bonds.
Sovereign bond origination has long been a key focus for Goldman Sachs. Although the bank expects corporate issuance to grow faster than sovereign business, Young stresses that sovereign business will not be de-emphasized. “Sovereign capital-markets business is not unprofitable,” he says. “While fees are small, volumes are big.”
Goldman Sachs groups issuance by sovereigns and supranationals together. The firm has a team dedicated to these issuers that works closely with the syndicate desk and other parts of the capital-markets business. Relationships with some sovereigns are handled by country heads.
The introduction of the euro has already had an impact on sovereign issuance: European countries have cut down on borrowing in their efforts to meet the Maastricht convergence criteria. But Young believes the change to sovereigns’ borrowing patterns may be less than many had expected. “Many people thought the euro 11 governments would become 100% focused on issuance in the new domestic market,” he says. “But that isn’t happening. We are still seeing borrowing in dollars and other currencies.”
However, there is no doubt that the introduction of the euro next year will make it harder for Goldman Sachs, with its traditional strength in dollars, to maintain its position as the pre-eminent sovereign Eurobond arranger. Michael Peterson
BEST AT HIGH-YIELD DEBT: BT Alex Brown
Of the US investment banks which position themselves as specialists in high-yield debt and leveraged finance, BT Alex Brown is doing the most convincing job of turning itself into a global operator.
It’s had a London operation for three years, longer than most of its rivals, and has led some of the groundbreaking deals in the development of the European high-yield market. Graham Clempson, the managing director who heads the European operation, points to the deal for Computacentre as one he is particularly proud of. “It was a relatively small deal at the time,” he says. “But it shows the full life cycle of high-yield financing. When we arranged their £50 million [$81 million] deal in November 1995 the company had an implied valuation of £200 million. They’ve just done their IPO valued at £1.2 billion.”
Since then, BT Alex Brown has arranged a number of high-yield issues in Europe. In March 1997 it arranged a $400 million acquisition financing for Investcorp to buy UK service-station chain Welcome Break, followed by a £320 million bond issue for the company in August consisting of a combination of secured notes and FRNs.
Strong interest from investors and issuers alike has led to a spate of deals in 1998. European high-yield issuance has increased from $1 billion in 1997 to $5 billion this year so far. Last April BT Alex Brown co-lead-managed with Barclays Capital a Dm190 million ($108 million) seven-year deal for chemicals company Ineos, funds used towards an acquisition. In May the firm led a £150 million issue for the UK betting shop chain, William Hill.
BT Alex Brown is not the only US investment bank trying to bring high yield to Europe. “Many of the US houses are increasing their staffing in Europe,” says New York-based Art Penn, head of global fixed-income capital markets. Those closest behind BT Alex Brown in volume of transactions are Morgan Stanley and Goldman Sachs. Merrill Lynch and Credit Suisse First Boston are also closely involved in the market.
But with issuance of over $100 billion a year, the US is still the market that counts in terms of high yield. The firm has increased its share of the US high-yield market in recent years and last year ranked second in highly leveraged lending behind Chase and third in high-yield bond underwriting behind Donaldson Lufkin & Jenrette and Chase. Few can equal the firm, though, in that most important asset for a high-yield house: the number of its bankers who learnt their trade at the kindergarten of junk, Drexel Burnham Lambert. Penn is one of several who worked on the firm’s legendary trading floor in Beverly Hills. BT Alex Brown’s president Ted Virtue was one of the creators of the high-yield commercial-paper market at Drexel.
The firm believes the key to its success is credibility and the quality of its credit analysis. “The barriers to entry in this business are higher than people think,” says Virtue. “What most concerns me is that a small firm without strong credit expertise, seeking to get into the market, will inflict long-term damage on itself and the market by underpricing deals and not executing properly. If this happens we will all suffer.” Michael Peterson
BEST UNDERWRITER OF ASSET-BACKED SECURITIES: Citibank
Over the past 18 months the depth, frequency and variety of the asset-backed debt market has increased substantially. Although traditional assets such as credit-card, home-equity and auto-loan receivables still make up the mainstay of the business, more and more assets are being securitized.
One of the major developments in the US has been in securitizing the stranded assets of the US utilities sector (many led by Morgan Stanley Dean Witter). There has also been a rapid growth in collateralized loan obligations, spearheaded by the former NatWest Markets (now Greenwich NatWest). Securitization as a tool in acquisition finance is growing, especially in Europe, with BT Alex Brown at the forefront; and even entertainment royalties are being utilized, small though this market is.
But only Citibank has consistently been involved in virtually all asset classes worldwide. Citi has deals under its belt for emerging-market countries, film companies, real estate and many others. It makes much use of commercial paper to securitize clients’ assets and so far has done around $40 billion in that market – although all bar $1 billion is privately placed. But Mike Stone is quick to counter claims that Citi is just a conduit house. “We use CP as another form of financing as and when it suits our clients. For example, we recently bid on a deal in Italy which we were keen to take public, but the CFO didn’t want any publicity, so we used CP and privately placed it.”
The Ffr1.5 billion ($250 million) deal for Rock Funding last year offers a good example of how Citi structures a deal – this one in the Paris real-estate market – to achieve a cheap cost of funds for the borrower. Axa-UAP wanted to dispose of rougly 3,500 units in 84 properties, so a company, Rosan, was created last July to take responsibility for selling them.
Citi split the portfolio of apartments into Paris districts, analyzed the prices for each sector since 1990, added in a time for the possible sale of each property, and allowed the models to go to work. “We took the absolute worst figure which came out, and used that as the basis for the deal. It still got us a triple A rating for a large chunk of the deal,” says Stone.
The bank’s record in asset-backed deals for emerging-market issuers is impressive, Last year it organized a deal for Bank Internasional Indonesia, based on the future revenue flows for tourism. Despite the effects of the Asian crisis, which almost brought tourism to a halt, the deal is still holding out.
Once the Asian crisis hit, the securitization market outside the west all but closed down, except for two transactions, both led by Citibank. The first was a $115 million deal for Turkiye Is Bankasi, which was closed even though the market was moving in 100bp blocks; the other was for another Turkish bank Garanti Bank in January for $175 million.
Citibank’s strength, says Stone, is derived from two sources: a thorough understanding of credit, and on-the-ground client relationships in 100 countries. It’s a tough act to follow, but Stone is by no means complacent: “In this market, the life span of the products is getting shorter and shorter as competition increases.”Antony Currie
HIGHLY COMMENDED: WARBURG DILLON READ
Warburg is the leading European bank in the sector, although it has come under some criticism for ditching the well-regarded UBS team (which decamped to CIBC). Led by Peter Shorthouse, Warburg’s asset-backed finance team has brought several innovative deals to the market. Its Glacier CLO for Swiss Bank Corp last September was the first securitization of credit-linked notes ($1.5 billion); it brought the first securitization of Paris Club debt to the market in January, a $650 million deal for Sace, the Italian export credit agency; the $120 million deal for Turkish bank Yapi Kredi in March securitized future foreign currency receivables; and in April the team closed a £260 million ($432 million) deal backed by the embedded value of life-insurance policies for Mutual.
The bank has proved its ability to use all tools at its disposal, including Euro commercial paper, Eurobonds, FRNs and fixed rate. Its one shortcoming is that it is primarily European-focused. Antony Currie
BEST MERGER: Citicorp-Travelers
The merger of Citibank with Travelers Group is either the most inspired banking merger for a generation or a wild gamble that will destabilize two of the strongest franchises in finance.
If size is a measure of success in today’s banking market, and the leading players believe it is, then the new Citigroup will be a resounding triumph. The merger creates a group with more than 100 million customers in 100 countries. 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.
If it works it will be because the cross-selling synergies identified by the two group’s management exist and can be realized. It looks good on paper.
Citibank and Travelers have large consumer operations with very little overlap. Citibank’s global consumer banking operation – the biggest in the world – is a natural home for Travelers insurance and investment products.
Salomon Smith Barney is a respected investment-banking operation. Citibank has relationships with more corporations – 1,400 multinationals and 17,000 at local level – and financial institutions, particularly in emerging markets, than any other bank. If the bank can sell investment-banking services to clients who till now have taken only funding and foreign exchange, then the potential for revenue growth is huge.
On the downside, the new organization will have 160,000 employees and at least three distinct cultures: the Travelers “family” of owner employees; Citibank, with its country heads and commercial banking fiefdoms; and the investment bankers at Salomon Smith Barney. The ambitions of much smaller banks have foundered on lesser organizational challenges and there are enormous technological hurdles to true cross-selling on this scale.
Nevertheless, Euromoney believes that the convergence of production and distribution of financial services will drive the industry over the next decade. We also think that true globalization means the commoditization of all financial services bar corporate advisory and structured finance. Low cost production and high volume sales will be the dominant strategy across the board. This kind of merger has the potential to create an institution that dominates in every volume business on a global scale. Come 2010, if Citibank has achieved its target of one billion customers, it will have fulfilled its aim that its name be synonymous with money. Simon Brady
BEST INTERNATIONAL EQUITY RESEARCH HOUSE: Merrill Lynch
Merrill Lynch has always managed to stay ahead of the market. Equity research is a good example, and in recent months the bank has been able to reap the benefits of its investments over the past three years. Following its acquisition of UK merchant bank Smith New Court in 1995, Merrill has taken or expanded stakes in brokerage houses in Spain, South Africa and Australasia. This year it took a 51% stake in Thai brokerage Phatra Securities.
The worldwide coverage these acquisitions provide, accompanied by internal growth, has put Merrill in an enviable position. The firm has boosted its headcount of equity analysts to 700 in 27 countries. As industry become more multinational this international coverage is proving an increasingly valuable asset.
On the Daimler-Chrysler merger, for example, Merrill was able to draw on the combined resources of its US, German and Japanese auto equity analysts in preparing the bid.
Merrill is one of the few banks to group recommended stock picks by sector; most do it by region only. Merrill combines all the major stocks in a particular sector from around the world. Antony Currie
BEST EMERGING-MARKET BOND RESEARCH: JP Morgan
With this award JP Morgan brings together two of its main strengths – leading positions in emerging markets and in bonds. The results are favourably received by fund managers.
“JP Morgan has by far the most comprehensive research effort,” says one fund manager. “Its staff is significantly larger than anyone else’s. They have people on the ground in most of the countries they are covering. They always make good markets in the bonds they are trading. Their research comes on a timely basis and covers fundamentals as well as relative value.”
Having researchers on the ground has clearly been critical to JP Morgan’s success in this area. Its valuation tools are superior and emphasis has been placed on information sharing between analysts across both geographical and functional boundaries.
The bank has created a whole family of both indexes and indices for assisting emerging markets’ investors and some of these have become industry standards.
Even rivals are complimentary about the firm’s efforts. “It’s difficult to compete with them because of the strong on-the-ground presence in so many markets,” says one. Brian Caplen
RUNNER UP: MERRILL LYNCH
BEST EMERGING-MARKET EQUITY RESEARCH HOUSE: Merrill Lynch
There’s nothing like a crisis to remind people how important research can be. And to show which banks investors rely on to provide it. Merrill Lynch’s emerging market research was holding a conference call with investors a few weeks ago, at a time when it looked as if Russia’s economy and financial system might be spiralling out of control. “Normally we have 20 or 30 callers on these things, says Dan Lubash, managing director of European emerging markets. “But this time there were over 150 trying to get through.”
It might not be a huge surprise at first that so many look to Merrill Lynch for their research, but bear in mind that, until recently, emerging Europe has been the bank’s weak area. Asia has taken up more resources than any other emerging market and Latin America is a region Lubash describes as a traditional strength for Merrill. The bank opened a full branch office in Moscow at the end of last year, and the acquisition of Smith New Court in 1995 brought with it some expertise in eastern Europe. But there are still gaps. Merrill’s president and chief operating offcer, Herbert Allison, expects to address these before the end of the year.
But Lubash has organized a team that has made some good early calls on eastern Europe. Merrill was the first to downgrade Czech banks in the first half of 1997, before it became apparent that they were carrying heavier losses than most of the market thought. And the firm was one of the first to recommend a shift from central and eastern Europe earlier this year in favour of the Mediterranean countries. “We saw a lot more upside in Israel, Turkey, and especiall
