Best bank
Not awarded
Best debt house
Citigroup/Salomon Smith Barney
Best equity house
Merrill Lynch
Best M&A/corporate finance house
Goldman Sachs
Best transaction services
JPMorgan
Best risk management and treasury
Citigroup
USA
Best bank
Wells Fargo
Best debt house
Citigroup/Salomon Smith Barney
Best equities house
Merrill Lynch
Best M&A house
Goldman Sachs
Canada
Best bank
Royal Bank of Canada
Best debt house
Merrill Lynch
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Dick Kovacevich |
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The combination of mergers, the tech wreck and the ensuing severe economic downturn has shaped the fortunes of North America’s financial services sector over the past 12 months. And in that environment the more established names have shown their relative strength. For more established, read large. This has not been the year for the niche bank to prosper, in investment banking at least.
Transaction services are to a degree less affected, with consolidation being the major factor in that market’s development. Bank of New York and State Street are two of the main players, and Brown Brothers Harriman has its admirers for being a strong smaller player in a game dominated by larger institutions. But the winner of the first regional award for transactions services in the US goes to JPMorgan Investor Services, as it has been named following the Chase-JP Morgan merger.
JPMorgan Investor Services has over 15,000 clients, ranging from financial institutions and corporation down to mid-market companies, and has a stunningly high return on equity in the region of 30%. The division starts from the premise that it can improve return on equity for its corporate clients by improving operating efficiency at the treasurer level – something that is instinctively appealing to a cost centre such as a treasurer.
Much of this is done using technology, and JPMorgan has been behind developing e-commerce payment and transaction services at major companies such as DaimlerChrysler, Nissan and Boeing. What’s more, it is carving out a niche for itself as adviser to spun-out parts of larger organizations that suddenly find themselves needing a treasury operation. Lucent Technologiesa spin-offs Avaya and Agere have used JPMorgan for this, and as well as helping to shape their systems, the team can also engage in a bit of cross-selling by getting the bank’s forex and debt treasury markets professionals to drop by for a chat.
In terms of custody, JPMorgan is a major player, being responsible for 85% of the assets of investment managers with five-star ratings from Morningstar. It is also lead provider of custody services to 18 of the world’s 20 largest asset managers, and gets 80% of its revenue growth from adding business from accounts it already has.
The award for best regional risk management and foreign exchange house was a close one. Deutsche Bank, which has won the global risk management award, has made great inroads into the US, and is a strong forex player. JPMorgan is certainly the latter, but its prowess in risk management, though still formidable, has taken a hit as a result of trying and failing to merge two very different cultures and very different modus operandi.
So the award this year is given to Citigroup/Salomon Smith Barney, which has successfully combined Citibank’s relationships and credit derivatives expertise with Salomon’s overall product knowledge. Citi has responded well to the growing risk sophistication of its clients, as well as the gap created by the turmoil at the old JP Morgan. Citi centres its approach around offering a full risk assessment to clients, based not on particular products, but on first finding out what a client’s risks are, and then looking for solutions.
To do this effectively the bank has devised a quantitative methodology to allow it within a couple of days, if not even 24 hours, of getting the relevant information to present specific and overall risk assessments to clients. This can be applied from anything to managing the risks inherent in running a business to offering a comprehensive risk management analysis of the best way to fund and hedge an acquisition.
Recent structures include credit-linked notes, allowing for a bifurcation of structural risk and credit risk: Citi keeps the former, and the latter is passed on to the market. Enron has been a big fan of this structure with its Yosemite deals.
As for forex, Citigroup’s operations have been dominant across the globe in the past 12 months, and the US is no exception.
What might surprise some is the lack of a successful regional commercial bank. No US bank has a franchise worthy of note in Canada, while the Canadian banks have stuck to pushing their US operations in one or two states at most. The reasons are two fold.
First, the Canadian government has been very protective of its domestic financial sector, preferring the status quo over either domestic or cross-border consolidation. Second, US banks weren’t allowed to operate across state lines in their own country until 1994, and – with the exception of Citigroup’s long-standing overseas operations – have chosen to buy and sell in their own backyard first. For this reason, the award of best regional bank in North America has not been given.
The US banking sector, however, is awash with candidates for the country award. Success or failure in mergers is a key determinant. Most of those that have disqualified themselves for this award are those that over-extended themselves during the merger craze of the 1990s.
One is First Union, which has had a dreadful couple of years since late 1998 trying and failing to integrate the 80 or more acquisitions then-CEO Ed Crutchfield had made. Staff and customers were leaving in droves. He made way for Ken Thompson in April last year, who immediately began to rectify matters: he closed the Money Store, sold off the credit cards and mortgage-servicing businesses, sold 90 branches and announced the largest ever restructuring charge for a US company – $2.7 billion. So far so good, but then in April this year he reversed course and announced a merger with Wachovia – great potential cost savings, but the price of failure for a bank not known for its integration skills will be severe.
Bank One under the leadership of Jamie Dimon is having a better time of it after suffering from its own integration issues in the late 1990s. It’s avoided many of the pitfalls of overzealous lending, but as yet it’s more a case of keeping an even keel than particularly impressing on either results or service.
Northern Trust, Bank of New York and Mellon Bank have excellent management teams, and have made a success of focusing on credit-averse, fee-generating businesses – Mellon, for example, is now a premier asset management firm with over $500 billion in assets under management. And Fifth Third, last year’s winner, is doing exactly what it is has done for years – concentrate on the basics of banking and build or buy selectively and cautiously where necessary.
But this year’s winner is Wells Fargo.
The management team, led by CEO Dick Kovacevich, has earned a great deal of respect over the years, starting at NorWest and then taking on the Wells Fargo name after the merger. They have proved to be adept at integrating their acquisitions and delivering on their promises, which keeps the shareholders happy. Unusually for a regional bank, Wells Fargo pays its employees based on their performance. That keeps them happy, assuming they do well, and can have the knock-on effect on how customers view the bank.
Being a California-based bank – although with operations in more than 20 other states – has left Wells Fargo exposed to the twin disasters of the tech wreck and the state’s energy crisis. Yet despite some bad loans and private-equity hits reported recently, the bank has done a good job of steering clear of the mire.
Its main businesses are consumer banking, corporate banking, leasing, mortgages and asset management. It’s one of the few banks to have had much success with cross-selling consumer products – NorWest first tried it back in the 1980s – and now each customer uses an average of 3.7 products, up from 3.3 at the time of the NorWest-Wells Fargo merger in 1998. And it has one of the best internet offerings too, with nearly 3 million customers logged on.
In Canada the situation is very different. There are far fewer banks – six national franchises – and all are still searching for the right approach following the government’s decision in 1998 not to allow domestic consolidation. Like their US cousins, though, they are being hit by deteriorating credit conditions, especially in the telecom sector, and a drop in revenues from investment banking and wealth management. But their investment banking efforts are also suffering as their US rivals take more and more business – especially Merrill Lynch and Goldman Sachs.
Doing the best job, according to analysts, are both Royal Bank of Canada and Toronto Dominion, the latter because it has been cutting costs at TD Waterhouse as well as still benefiting from the cost saves following its acquisition in 1999 of Canada Trust.
But Royal Bank of Canada wins the award for best Canadian Bank because of its broader franchise and better expense controls. It is the leader among Canadian banks for foreign exchange and debt markets services both at home and abroad, and has the dominant domestic franchise for equity and M&A, although it is losing out to the US investment banks each year. But retail has been the real boon, with earnings growing 26% year on year by the end of the second quarter as a result of margins on loans widening.
There is much more cohesion across North America in investment banking, which in itself is a reflection of the increasing desire of Canadian companies to tap the US market. Firms such as 360 Networks and Nortel Networks have stock listings in the US as well as Toronto, many more M&A deals are cross-border, and there hasn’t been a significant high-yield debt deal in Canada for three years – they all launch in the US.
Unsurprisingly, therefore, the winners of the regional investment-banking categories are all US banks, and happen to be the same banks as those that won the US awards.
The industry has been in flux in the past 12 months following two big mergers (CSFB-DLJ and Chase-JP Morgan), and the severe economic slowdown.
Conspicuous by its absence from the awards this year is Morgan Stanley. The firm hasn’t fallen off a cliff or lost all its staff, but has had a very tough 12 months.
Not only has it lost its charismatic chief, John Mack, who went in March after losing a power struggle with CEO Philip Purcell, but also the entire senior management team last July running fixed income, as well as losing a whole raft of bankers in debt and M&A to its rivals. And it reported losses in its high-yield division of $90 million, which several competitors and analysts think could actually have been much higher.
It has managed to bring many of the IPOs this year, but has managed only to satisfy one half of their clients – the issuers – as many of their deals remain below offer price, months later. Its debt markets team has been more active, but has also brought one or two of the worst deals this year, especially Citizens Communications in mid-May, which tightened by 40 basis points as soon as syndicate broke, and was trading a further 60bp tighter within a week.
Replacing Morgan Stanley this year as best equities house in the US, then, is Merrill Lynch. Merrill wins because it dominates the sector of equity capital markets that has been responsible for over 50% of equity issuance this year – convertible bonds. Merrill has a roughly 25% market share, is the main innovator of product, and has not been bogged down by rumours of bought or unplaced deals as some competitors have. On one day last November it managed to price the largest US convertible ever, a $3.45 billion issue for Tyco, introduce a new structure for it, document it within four days, price it overnight, and still price two other deals.
The winner of best debt house was also a tough call. Merrill continues to sit at or near the top of the league tables.
And CSFB has astounded everyone with its ability to keep going despite losing nearly all its key staff at some point or other.
But the winner is Citigroup/Salomon Smith Barney. It’s been more than three years since the merger, and almost immediately the mix of Salomon Brothers’ first class bond market operations and Citibank’s balance sheet and relationships started to pay off.
There has been very little turnover, most of the senior managers, such as Geoff Coley, Randy Barker and Marwan Marshi have been at Salomon for years, thus providing consistency, and the firm has taken an enlightened approach to integrating the loans platform. Citibank had been cutting back its lending commitments pre-merger, but afterwards it was decided selectively to expand them, so although a big lender, Citigroup says it has no designs on the top spot..
The best M&A house continues to be Goldman Sachs. With deal flow well down, it is still managing to hold on to top spot, advising on most of the biggest deals of the past year, such as Wachovia’s sale to First Union, and AIG’s bid for American General.
Because the US market is so dominant, even in a downturn, these three banks also win the regional awards in these categories.
