North America
After looking at the first quarter results for many of the banks and securities houses in the US, you could be forgiven for thinking that nothing has changed much in the past year. Most produced very healthy results, some had record quarters.
Mergers and takeovers have continued, of course, but not in the same vein as last year. There have been no domestic link-ups on the scale of Citicorp-Travelers, BankAmerica-NationsBank or BancOne-First Chicago; instead, consolidation has seeped one level lower, to the likes of Fleet-BankBoston and, just last month, the $5.9 billion merger of Zions Corporation and First Security Corporation.
Elsewhere, though, there has been upheaval. Two of the top three securities firms in the US, Merrill Lynch and Goldman Sachs were hit by the Russian meltdown (Morgan Stanley Dean Witter was less severely affected).
One fared much worse – Bankers Trust was too badly hit to rise phoenix-like from the flames this time; the rating agencies were said to be on the verge of downgrading the bank to junk status. Instead it was ensnared by a $10.1 billion offer from Deutsche Bank, which just five months before, abandoned its ambitions to build organically in the US.
None of the others lost its independence, but Merrill lost about $900 million as a result of the crisis in Russia. Its reaction, while not too different to that of its peers, was more public: roughly 500 people in debt capital markets were sacked (roughly 20% of the division’s workforce), including many senior managers. At Goldman there were also sackings, but attention focused on a brewing palace coup after the crisis delayed the firm’s IPO. Jon Corzine, co-chief executive with Hank Paulson, was forced out, but left with options worth $200 million, giving him the ability to fund his own run for a seat in the Senate, if he chooses to.
Also out as a result of the 1998 crisis is David Coulter of the old BankAmerica. The bank lost $1 billion primarily as a result of its strategic link-up with derivatives firm DE Shaw. That leaves the ebullient Hugh McColl in full charge of the merged entity.
The next head people expect to see on the block is of one of the two co-CEOs of Citigroup. This behemoth has not had a bad 12 months, and Salomon Smith Barney, has got off to a flying start this year, especially in debt products. But the checklist of things to achieve within the first 18 months of the merger drawn up by John Reed, co-CEO from the Citicorp side, shows little progress: of the seven divisions he has listed as crucial to integrate and develop, only asset management has made any significant progress.
North of the border in Canada, most of the bank CEOs can only dream of having such a problem. Despite all their efforts to merge – or maybe because of them since they refused to wait for the outcome of a government study on mergers and appeared to go behind the back of the finance ministry – Canada’s banks are for the moment stuck in solitude. The proposed mergers of Royal Bank of Canada with Bank of Montreal, and CIBC with Toronto Dominion, were rejected by the government on competition grounds.
Only one of the four banks reported a growth in profits for the second quarter. The others saw a decline due to increased expense bases and tightened spreads in domestic businesses – exactly the reasons they gave for joining forces in the first place. Now the threats posed by Citibank and HSBC in commercial banking, American Express and ING in retail savings, and by Merrill Lynch in investment banking following its acquisition last summer of Midland Walwyn, will be even more potent.
In the US and Canada, investment banks are getting excited about the internet. Two internet brokerages, DLJDirect and Discover Brokerage, have been up and running for a while, and the former has recently listed a portion of its stock on the New York Stock Exchange. Canada’s leader, Toronto Dominion’s Waterhouse Securities completed its own IPO last month. Now that Merrill Lynch has announced a comprehensive plan for its retail brokerage business, how will other big brokers respond? Antony Currie
USA
Best bank: Chase Manhattan
Best foreign bank: ABN Amro
Best securities firm: Morgan Stanley Dean Witter
Highly commended: Merrill Lynch
Best foreign securities firm: Credit Suisse First Boston
Highly commended: Warburg Dillon Read
BankAmerica, last year’s winner of best US bank, still retains an impressive franchise. With 4,800 branches it has the largest branch network in the US, the most ATM machines, and an enviable series of corporate relationships. But in the past year it suffered the embarrassing loss of $1 billion, not to mention the swift departure of one of the two architects of the NationsBank-BankAmerica merger, David Coulter. Citigroup, too, is a formidable house, but much remains to be done on integrating the Travelers-Salomon-Smith Barney-Citicorp medley.
So this year’s winner is Chase Manhattan, now reaping the benefits of the Chase-Chemical merger three years ago. Chase is still the number one loan arranger in the US, and a recent study by Paine Webber’s bank analyst Ruchi Madan reports that this sector is now the largest financial market in the US; Chase controls 28% of it.
What might be more surprising is Chase’s rapid improvement in mergers and acquisitions advisory. With no equities capability, this ought to prove difficult, but Chase now ranks ninth. With more and more mergers and acquisitions requiring initial loan financings, however, it should not come as such a surprise that Chase ranks so highly for a commercial bank.
Chase excels in other areas, too: it is one of the top derivatives houses, has regained its strength across the board in foreign exchange which was dented after the merger. And is the largest global custodian with $5.2 trillion in assets under trust and custody it boasts a formidable presence in the US.
Nor is Chase a small potato in consumer banking. It is the fourth largest issuer of credit cards in the US, the top bank originator of auto loans and leasing, and the third largest originator of residential mortgage loans.
Morgan Stanley Dean Witter wins the award for best securities firm this year. As with Chase, the company is beginning to see the benefits of its merger as the retail broking force of Dean Witter has helped diversify earnings and so added stability. Institutional and retail fund management also performed well, with assets under management increasing just over 10% to $376 billion.
Its more disciplined approach to trading and risk management helped it to avoid the pitfalls of some of its peers. Strong showings in debt and equity underwriting last year pushed Morgan further up the league tables as others suffered from the Russian crisis. Merrill Lynch was hit badly on high yield, as well as emerging markets debt, and spent three months restructuring the group. Goldman Sachs has slipped considerably in the US debt league tables this year.
In equities, Morgan Stanley has continued its excellent showing, continually doing well in analyst rankings. In last autumn’s Institutional Investor rankings, for example, Morgan came joint second with Goldman Sachs (behind Merrill Lynch) with 50 ranked analysts; it did have the most top team positions, however, winning 19 categories. One equity deal Morgan likes to point to as an example of its success last year is its role as lead manager in the $4.4 billion spin off of Conoco from Dupont, which was launched in a virtually dead market last September.
Despite its losses in the debt markets, Merrill Lynch has come thundering back, confounding its critics by announcing record first-quarter results in April just three months after announcing its first quarter loss in 10 years. Its debt team appears to have maintained its lead, and after months of attacking the concept of on-line brokerage Merrill announced a comprehensive internet strategy to work in tune with its force of 14,000 retail brokers.
Only HSBC and ABN Amro have any significant commercial banking presence in the US. And for now ABN Amro stands out. HSBC may be seeking a US listing, may have rebranded Marine Midland as HSBC and may be in the process of acquiring Republic National Bank, but ABN Amro’s franchise is larger and of longer standing. ABN Amro owns LaSalle Bank, European American Bank (EAB) in New York, Standard Federal in Michigan, and Chicago-based investment-banking arm Chicago Corporation, as well as having 11 ABN Amro offices. Pre-tax profit from ABN Amro’s US operations rose 42% last year from Fls1.5 billion ($700 million) to Fls 2.15 billion.
Foreign securities houses continue to find the going tough in the US. Selling non-US products offers a good niche, but has not been as profitable this year due to the strength of the US economy and the weakness of the euro. Nor does it bring in the heftier fees which domestic investment banking in the US can provide. Deutsche Bank’s acquisition of Bankers Trust might change matters, but not for some time; Bankers is not a bulge-bracket firm, so in investment-banking terms the acquisition is just a stepping stone.
The winner this year is Credit Suisse First Boston. That may prove a controversial choice among those CSFB employees who prefer to think of themselves as part of a US organization. But foreign-owned it is, and offers the only foreign competition to the US houses. In investment grade debt, it ranks eighth so far this year, the only non-US house in the top 100; last September it lead-managed the $1.2 billion high-yield offering for CalEnergy, which restarted the US high-yield market after the global credit meltdown. In M&A, CSFB is in the top five, having advised, for example, AT&T on its $70 billion acquisition of Tele-Communications and its $64 billion acquisition of MediaOne – one of the largest ever hostile bids.
Warburg Dillon Read has taken on the mantle left by the former UBS Securities in attempting to build a US business. For now, though, it has done little with Dillon Read. Instead its efforts have been concentrating on maintaining its top position selling European equities to US investors, and on building a US equities research team and linking it with Warburg’s global marketing approach for the 20 main sectors it covers.
Canada
Best bank: Bank of Nova Scotia
Best foreign bank: HSBC
Best securities firm: TD Securities
Best foreign securities firm: Merrill Lynch
It has not been a happy year for Canada’s banking sector. The merger plans of Royal Bank of Canada and Bank of Montreal, and Toronto Dominion and Canadian Imperial Bank of Commerce were thwarted in December by the government, after the banks had spent eight months talking up the rationale for linking up. The decision hit the first two banks more than the latter pair, mainly because it was RBC and BoM which had driven the process.
The best performing bank, therefore, was Bank of Nova Scotia. It was not involved in any merger talks and, much to the annoyance of the other four, campaigned against them. It had, though, bought National Trust in 1997, adding to its mortgage and other lending capabilities. In its most recent results, the bank announced that its corporate banking division saw an increase of 54% in net income, largely as a result of its increased lending book in the US.
The failed mergers have also hit the securities arms of the major banks. CIBC World Markets, usually the strongest in Canada, saw its net income in the second quarter reduced by 22% to C$100 million (US$68 million), and was largely responsible for the 6% drop in parent CIBC’s return on equity to 12.1%.
Unlike CIBC and Royal Bank of Canada, TD Securities has been grown organically from within the parent bank, Toronto Dominion, and so claims to have a well-defined culture, and better integration. “We feel we have an advantage since we’ve been operating on a more integrated basis in every business line right from the start,” says TD Securities chairman and CEO Donald Wright.
The firm is always in the top two or three in underwriting domestic corporate bonds, has a good track record in media and telecoms, and so has done well out of the high-yield debt mania for such paper in the last two years. It has been capitalizing on its traditional strengths in the Canadian markets – providing finance for projects involving natural resources, mining and forest products – and is one of the front runners in funding the government infrastructure projects which have sprung up over the last two years.
In London it has a relatively small but successful capital markets team which is the leading Canadian underwriter of Eurobonds in Canadian dollars, Australian dollars and New Zealand dollars and Polish zloty, and which has a solid presence in interest rate and credit derivatives. Its major success, though, is Waterhouse Securities, its now separately listed discount brokerage service.
HSBC Canada (formerly Hongkong Bank of Canada before the global rebranding of HSBC earlier this year) opened in Canada in 1981, and has been on a course of almost constant expansion for the last four years, whether buying rival businesses or setting up its own operations. In the last year it has added to its array with three more acquisitions. In May 1998 it bought NatWest’s Canadian operations (adding to the Barclays Bank business bought in December 1996), that buy contributed C$109 million of net assets to the pool.
In July it acquired a Toronto-based retail broker, Moss Lawson, and in January announced it was to buy institutional investment dealer Gordon Capital, also based in Toronto (with C$45 million in net assets).
Yet again, Merrill Lynch wins the award of best foreign securities firm in Canada. In 1998 Merrill came top in international equity and debt financings undertaken by Canadian issuers, and ranked second in mergers and acquisitions involving Canadian firms.
One year ago Merrill bought brokerage firm Midland Walwyn for $885 million. It was not the most auspicious start when third-quarter earnings of the newly acquired company showed a marked decline, but since then the integration of the firm has gone well. Several senior executives were in fact former Merrill employees. Its 1,300 brokers now make Merrill one of the top three private-client groups in the country. AC
