Best bank – Not awarded
Best risk at risk management – Deutsche Bank
Best at custody – JPMorgan
Best at cash management and payments – Bank of America
A continued lack of significant penetration of both the US and Canadian banking and investment-banking businesses means that, yet again, several regional categories remain without winners in North America. In fact, the trend in wealth management and investment banking, at least for US players, is to leave the Canadian domestic market or significantly reduce their presence. No US investment bank can make much of a claim to having the full range of products in place; in the past three years several have pulled out completely, or left a skeleton staff in Canada with most of the work done from New York. Even then it’s mostly for cross-border business.
Canadian banks have shown a greater willingness to persevere with their investment-banking ambitions in the US, even during the economic downturn of the past three years. But it has been a hard slog. None can boast a large presence in any event, and what they do have has been hard to sustain. It’s been hardest for Toronto Dominion’s US operations: revenues at TD Waterhouse, its internet brokerage operation, have slumped. Moreover, less than a year after buying its way into the US equity options business the bank admitted in January that it wasn’t working and scaled the business back. It announced a restructuring charge of C$80 million (US$58.7 million), and warned that more restructuring, and a charge of up to C$50 million, might still be possible.
There is even less US participation in Canadian retail and wholesale banking. It’s a mature market dominated by five domestic banks that would rather get on with merging with each other but are still being hindered by the reluctance of the Canadian government to allow them to do so. Late last month Canadian finance minister John Manley stated that there would be no chance of any domestic banking mergers before September 2004, at the earliest. Any attempt to get into the market by US banks would almost certainly be very bad news for their shareholders.
Canada’s banks, meanwhile, continue to pursue their regional retail banking strategies in the US. Royal Bank of Canada, for example, bought Eagle Bancshares in Atlanta and Admiralty Bancorp in Florida in the past 12 months.
The lack of strong operations in both countries is also true of the three regional categories that have been awarded. Each institution has therefore won on the basis of its US operations.
The custody business in the US is dominated by three players, but JPMorgan Investor Services clinches the award this year as a result of continued success with existing clients, winning some high-profile mandates, and for an intriguing acquisition. JPMorgan Investor Services provides general account services to 20 of the top 100 life insurance firms, claims 48% of the property and casualty custody business and is the second-largest custody house for mutual funds. According to the bank, more than 75% of its new mandates are won from existing clients. One such example is Oppenheimer Funds, which increased the amount of funds under custody with JPMorgan to $35 billion. New business won includes the $1.9 billion contract for the Dallas Police and Fire pension scheme and the YMCA’s $3.2 billion retirement fund.
Then there is the acquisition: last August JPMorgan Investor Services announced that it was buying Plexus Group, a research company that specializes in analyzing equity trading costs. Plexus is best known for its iceberg model, which shows that the hidden costs of executing trades are much higher than the visible cost paid to a broker, such as opportunity costs, stock-price impact, and market impact as other traders realize what’s going on. Plexus helps to minimize these costs for plan sponsors and traders. At a time when the buy side has been searching for any way to reduce costs exacerbated by poor fund performance, JPMorgan Investor Services did well to get its hands on a ready-made tool to slot alongside its more traditional custodian services.
Bank of America is this year’s winner of the cash management and payments award. It’s a big business for the Charlotte-based bank, which has a greater presence nationally than any of its competitors. It’s responsible for more than 10% of overall bank revenue: including its international operations, global treasury services brings in revenue of about $4 billion, which translates into $1 billion of net income.
Roughly 90% of its business, though, is driven from the US, and comes from the full spectrum of large, medium and small companies. Its dominant position can be gleaned from its association with Fortune 500 companies: 83% of them are Bank of America treasury services clients. Its services rank very high in independent surveys: Ernst & Young’s US treasury management survey last year ranked BoA number one for volume among US banks for account reconciliation, cheque clearing, EDI electronics, purchasing card customers, sweep accounts and wholesale lockbox. A survey by Greenwich Associates also places Bank of America in top spot for a number of treasury management services, including for market penetration to large and mid-cap corporates.
Risk management is never an easy category to award. Few firms can truly claim to offer a comprehensive array of solutions across all products in a concerted manner to a broad array of clients. It has not been an easy year for one of the perennial contenders in this category, JPMorgan. Its client business has stood up relatively well given the turmoil, but senior managers have still been leaving, especially in the CDO group, although those managers have been replaced and the bank is getting more business again.
The corporates that Euromoney spoke to call the bank’s risk management services solid, with some temporary loss of focus when parts of the business were restructured before and after Christmas. JPMorgan’s track record in risk management for its own account has also been mixed in the period under review. Last September, CFO Dina Dublon had to tell investors that in the previous two months the bank had “lost money on positions taken across our dealer book”. It was the only major US bank or investment bank to have such poor trading results in what was admittedly one of the most volatile trading environments ever. The good news is that trading results have improved since in much more favourable trading conditions.
Goldman Sachs, meanwhile, appears to have a good array of products in foreign exchange, fixed income, equity derivatives and commodities, and complements that with a risk-management advisory capability that doesn’t report to the trading desks. It’s a model others claim to have without showing much evidence for it. What hampers Goldman in this award, though, is its scale: other institutions offer at least as many services but to a larger and broader array of clients.
The winner of the award this year, then, is Deutsche Bank, the first time a non-US firm has succeeded in this category. It is the result of several years building the business across all products, and of being comparatively unencumbered by the fiefdoms and silos that most of the more established players have had to deal with.
It’s also the result of building up some of the underlying businesses, most especially high-yield debt and foreign exchange. The former has been especially important in recent months as clients have sought to manage their exposures to junk bonds either in single positions or in the high-yield corporate debt CDO market.
A top-tier presence in credit derivatives is crucial here, and Deutsche has been at the forefront of that market, along with JPMorgan, since its inception. In the past year, Deutsche has used that knowledge to become one of the chief proponents of capital structure arbitrage, which calls for using the full area of debt and equity products to manage investment positions in a company’s capital structure. Initially Deutsche was doing this purely as a proprietary trader, but has increased its service to clients as more and more investors, mainly hedge funds, have taken an interest in the strategy.
One particular client base where Deutsche has played a major risk-management role is the financial services sector. Many of the US banks still have loan and corporate bond books overly weighted to one sector or geographic area of the US as a result of their franchise or speciality. And then there is managing mortgage risk, an area of huge growth over the past 24 months as banks have become even larger buyers of mortgage-backed securities and whole loan mortgages as a way of supplementing earnings: as interest rates fall they take the positive carry. But in the past 12 months there has been an increasing focus on prepayment and extension risk and how best to hedge before interest rates rise.
Deutsche was never much of a player in this business until early last year, when it made a strategic decision to build it up. It has since risen from being just inside one of the top 20 players in the sector to top 10.
Deutsche has very strong equity derivatives, programme trading and transition management businesses, having hired a team from NatWest in 1998 that had developed the prime brokerage and equity derivatives business at Morgan Stanley in the 1980s.
