Foreign exchange bankers with a long memory could be forgiven for thinking they are in a time warp.
Merrill Lynch is building up its forex operations. It says it is committed to the business. It is hiring people, building up its client base and generally making a push into a market in which, frankly, it doesn’t have much excuse for being so weak in the first place. And it has shot up through the rankings in the Euromoney poll.
But this is not 1997, when Merrill Lynch built up its forex business and ranked third for overall market share, having come in at 24th the previous year. After that startling success, it gradually slipped right back.
This is 2003, when it has jumped up to 11th for market share, at 2.98% of the total. This time it says everything will be different. It is here for the long haul. And it is going for the top slots in 2004. One thing is for sure: if it is wrong this time, Merrill is going to be a laughing stock.
“Has Merrill Lynch tried this before? Absolutely,” admits Michael DeSa, the bank’s global head of forex, who was brought into the firm in November 2001 having built Deutsche Bank’s forex franchise up practically from scratch. Before that, he was the head of Citigroup’s north American forex operations. Nevertheless, he adds: “We are serious about what we are doing and the market knows that. Our rank at number 11 is a good start, but we will not be satisfied until we get to number one.”
DeSa sends a signal
The appointment of DeSa is central to Merrill’s new push into forex. He has helped to attract new talented people into the team who otherwise would never have considered it. He’s well respected in the industry, especially on the back of what he achieved at Deutsche, and he tells a convincing tale of the bank’s commitment to the business.
“What prompted my move to Merrill Lynch was a significant commitment by the top executives to build the foreign exchange business,” he says. Stan O’Neal, the firm’s chief executive officer, is himself an enthusiast for the project. “It is rare to see a strategic initiative backed by so many senior managers,” adds DeSa.
It is easy to see why they should back it. Equities, which have long generated healthy revenues, are in the grip of a slump that shows few signs of abating. The bank had to find a counter-cyclical asset class to earn money from. And forex had always been an area where it was peculiarly weak, given its good access to real money accounts and other key client groups.
Merrill Lynch hopes to grow in forex partly by making it work better with the other services that the bank offers, particularly credit and rates, but also equities and banking. And it is also happy to handle small-ticket business. “Our model is to become the favoured partner for corporates,” says Patrick Bauné, MD and co-head of the global forex issuer client group. “To do that we need to build trust. We are not just there for the complex derivatives. We want these clients to feel that Merrill Lynch will listen, offer proposals that make sense, and take into account their constraints. Then when they have a new issue or problem they will turn to Merrill Lynch because they trust us.”
Bauné joined Merrill from Goldman Sachs, where he ran forex with Mike Burton. And Bauné has certainly been busy hiring, though perhaps not as rampantly as competitors suspect. The bank has added around 70 new people to its sales and trading teams, but it has not increased overall headcount. Instead it has removed old wood from the teams and replaced those people with younger, more enthusiastic talent. The average age of people on the team is around 24. And the bank has refocused on sales rather than trading.
Other banks’ forex divisions are full of cynics who doubt that Merrill Lynch can build a cohesive team amid such hiring and firing. DeSa is phlegmatic on that point, as well he might be given his formidable record of firing people from Deutsche Bank. “Any significant build leads to turnover,” he says. “It is necessary in the early stages, until we establish a deep-rooted culture with all of the new professionals joining the firm. With a significant intake as we have done, it is inevitable that some individuals do not make the adjustment.”
New teams
Bauné echoes that point. “Our story is gaining strong momentum,” he says. “We don’t want mercenary people. We want entrepreneurial people who are looking for an exciting challenge.” That is no doubt a barbed reference to Merrill Lynch’s failed effort to lure three people away from Goldman Sachs – Bauné’s old team – through what threatened to descend into a bidding war. Questions about that episode at Goldman Sachs are met with little more than wry smiles. Both sides now claim to have got what they wanted.
Senior managers including Bauné are confident that Merrill will continue to surprise the other big banks in the market. For their part, those other banks don’t think any newcomers stand much of a chance. Take Richard Moore, for example, global head of forex at Citigroup. Does he have any concerns about any new competitors moving into his territory? “None whatsoever,” he says, without a moment’s hesitation.
The competition is clearly waiting for Merrill Lynch to fail. Snide remarks about its overspending and underestimating the task come from pretty much anyone who is established in the business.
But Merrill Lynch insists that it has a firm hand on costs. “I spent nine years at one investment bank, and now I have been at another for seven months,” says Bauné. “One thing stays the same, which is the focus on the bottom line. We don’t want to be the biggest – we want to have a very profitable business. We could be number one in the poll but make zero profit.”
DeSa, Bauné, and the rest of the team have made a good start. The firm has nearly doubled its European client base. It has risen 13 places in the market share rankings for this year’s poll, which is quite an achievement given that the concentration of volumes among the top banks is becoming ever more pronounced.
The European team only really came together with Bauné’s arrival in summer 2002. The real test will come over the next year or two.
