Awards for Excellence 2002
Best bank: Not awarded
Best equities house: Not awarded
Best debt house: Not awarded
Best M&A house: Merrill Lynch
Best at risk management and treasury: JP Morgan
Best at custody: State Street
Best at cash management and payments: Citigroup
There are no awards for best bank, equities house or debt house this year. For two countries with a common language, a love of the same sports and a porous border stretching more than 3,000 miles, the lack of a dominant regional bank or brokerage house is astounding. No US commercial bank has a meaningful presence in Canada, nor do US investment banks make much effort to win domestic Canadian business. Merrill Lynch in M&A is the exception but outside of M&A it has not been much of a player in the past 18 months.
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Royal Bank and Bank of America: leaving the competition behind, north and south of the border |
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Canadian banks and brokerages have made more of an effort to get involved in the US. Bank of Montreal owns Harris Bank, CIBC owns brokerage Oppenheimer and Royal Bank of Canada owns Dain Rauscher. But they are only small players in their neighbour’s markets. Best M&A goes to Merrill Lynch – the only bank in the region with a significant presence in both markets. It has never been the force in US M&A that it would like to be but is a strong upper-second-tier player. In Canada, however, it has given the two main domestic banks, Royal Bank of Canada and CIBC, a run for their money for top spot for 18 months. Merrill was the largest M&A house in 2001 in Canada, though this year it has slipped to sixth.
The best at risk management and treasury in the US is JPMorgan. That might seem counterintuitive for a magazine that was the first, last November, to point out deficiencies in its risk management. But much of that story dealt with internal risk management deficiencies that the subsequent Enron collapse highlighted. The client side was also hit as many of its derivatives marketing team left for competitors. That has continued this year, albeit on a smaller scale, with Bill Parsley leaving.
But the client-focused risk-management franchise is more stable than it was and the bank is strong in other areas: it is one of the two leaders in credit derivatives along with Deutsche Bank and is the largest bank in the flow business for derivatives products.
If the award were simply for risk management Deutsche would have won – just. Deutsche, while smaller in the flow business, is the leader with Morgan in credit derivatives and has been responsible for some of the most impressive derivatives deals in the US in the past 12 months, such as the $40 billion notional deal for FleetBoston.
Including the treasury markets, however, tips the scales back in JPMorgan’s favour. The bank has combined two high-quality second-tier US commercial paper businesses into one strong franchise that continues to win business faster than its competitors; it’s strong in repo; and according to May’s Euromoney foreign exchange poll is second only to Citigroup in the US.
State Street is the winner of best custodian in North America. In some respects, claims head of investor services Jay Hooley, it’s simply been a case of “doing what we’ve always done, providing good service to pension funds and mutual funds for their front, middle and back office operations”.
The current climate is perfect for custodians to expand their business – investors are looking for ways to cut costs as investment returns continue to be sluggish, and outsourcing the back office, and increasingly the middle office is one way of achieving that. Hooley thinks State Street has done well at this: “We have won a disproportionate amount of business from new and existing clients,” he says.
Citigroup follows its success in the global awards for cash management by scooping the North American award too. It continues to hold off opposition from its closest competitors in JPMorgan and Bank of America.
Antony Currie
CANADA
Best bank: Royal Bank of Canada
Best debt house: Royal Bank of Canada
Best equities house: CIBC
Best M&A house: CIBC
A combination of good management and a diversified platform helps Royal Bank of Canada win the best bank award again. It is a top-three player in each of the three main investment-banking categories, has a more diversified loan book than some of its peers and is the clear leader in foreign exchange. Its wealth management business has performed well, given the environment, as has the retail bank. All the while executives keep a close eye on expenses.
RBC’s diversified loan book and top ranking in the Canadian dollar bond market make its investment-banking division, RBC Dominion Securities, the obvious winner of best debt house in Canada.
The bank was also a close second for the best equity and M&A awards but CIBC is the marginal winner if only because of league-table rankings. Canada is one of the few countries where M&A volumes have been relatively robust, and CIBC, RBC and Merrill Lynch have been the front runners for the past 18 months. Merrill has done slightly more in volume, but CIBC World Markets has done more transactions.
USA
Best bank: Bank of America
Best debt house: JPMorgan
Best equities house: Merrill Lynch
Best M&A house: Goldman Sachs
Four years ago Bank of America seemed to be the big merger creation to beat. The union of BankAmerica and Nationsbank created the largest commercial and retail bank in the US in assets, retail deposits, ATMs and cheque-clearing services.
A year later it was in a mess. The bank had been created by a series of mergers, small and large, throughout the 1990s by Nationsbank CEO Hugh McColl but investors – and customers – were no longer getting good value as integration issues hit customer service and the stock price.
That started to change in 2000 when Ken Lewis, the bank’s president, was given more control over day-to-day operations before becoming CEO in April last year. In the intervening period Lewis and his chief lieutenants have focused on properly digesting all their mergers, reorganizing the main business lines, hiring in outside expertise where needed (especially in the investment-banking and asset-management divisions), and trying to sort out the share price. Executives constantly talk about running businesses so that they are shareholder value added, and about Lewis’s management style being based on six sigma, the doctrine used so effectively by Jack Welch at General Electric.
To date, they appear to have had a lot of success. The investment bank, though not a first-tier player, is a strong force in US debt markets and has a growing market share of equities and M&A business. The bank has a formidable loans presence, with roughly 20% of the market, and has not been caught in as many loan-loss situations as the US’s largest lender, JPMorgan. From a shareholder perspective the bank is also trying to reduce its balance sheet commitments where they are unlikely to lead to more profitable business.
There are still some issues to deal with – foreign exchange, for example, though profitable, is not the powerhouse it could be (the bank makes less than Goldman Sachs in foreign exchange), and the securities services division does not yet beat its shareholder value added targets.
But there is an air of confidence at the bank, which investors seem to share: Bank of America’s stock has risen over 20% in the past 18 months, more than any other US bank’s.
JP Morgan’s problems with Enron, telecom loan losses, private-equity losses and management reshuffles have kept the bank almost constantly in the news. During that time, though, its debt markets franchise has continued to prosper. It is still the largest arranger of loans in the US, with 34% of the market in the first quarter this year, nearly double its nearest competitor’s. And loan-loss reserves are among the best.
In corporate high-grade bonds the bank is second and continues to challenge Citigroup. It’s the largest player in credit derivatives and the largest in flow business for swaps and options. It has increased its US commercial paper book by 9% while the market has shrunk 20% or more. And its reputation in asset-backed securities is such that it underwrote many of the deals that reopened various ABS market sectors after September 11: it launched the first auto deal, for Ford; the first credit card deal, for MBNA; the first retail credit card deal, for Sears; and the first home equity securitization, for Chase Financial.
Citigroup is the other contender, being the largest bond house in the US but JPMorgan’s strength in loans and derivatives and to an extent asset-backed securities and commercial paper seals it.
Poster child
Giving Merrill Lynch the best equities house for the USA might seem odd. Isn’t this the brokerage that has just shelled out $100 million to get New York state attorney general Eliot Spitzer off its back over allegations of conflicted research? Yes it is, but Merrill just happens to be the poster child for the rest of the industry, all of whose members could be facing similar fines too. (For a more detailed explanation, see world’s best equities award.)
Spitzer’s accusations have done little to dent corporate or institutional investor confidence in Merrill Lynch. It might not be the biggest IPO house – it hasn’t been since before the 1998 market meltdown – but in the current environment that is no handicap. But Merrill is one of the top players in secondary offerings, arguably the market that shows the true worth of a firm’s franchise, and continues to dominate the league tables for convertibles.
What’s more, Merrill Lynch is also the largest secondary trader of equities in the US, both for listed stocks on the New York Stock Exchange and, since fully combining its operations with Herzog Heine Geduld earlier this year, for the Nasdaq over-the-counter market. It’s the only firm that can boast long-term strength across the board in all areas of equities. Merrill has the most balanced business on the Street.
Goldman Sachs remains the leading M&A house. In the past year it was adviser on announced transactions worth $337 billion. That is 50.6% of the market, making Goldman by far the largest in terms of volume. Morgan Stanley is second with 34.9%. In terms of number of deals, Goldman advised on 139 deals, second only to CSFB, which worked on 179 deals, thanks largely to the middle-market franchise it acquired through DLJ.
