Best bank
Deutsche Bank Best debt house
Deutsche Bank
Best equities house
UBS
Best M&A house
Morgan Stanley
Best at risk management
Deutsche Bank
Best at cash management
ABN Amro
Best at investor services
JPMorgan
Most improved debt house
SG CIB
Bankers in western Europe have developed a new hobby: bashing Deutsche Bank. Debt, equity and even foreign exchange executives at other firms often insist that Deutsche manages to stay at or near the top of league tables by using its balance sheet to snag business it would not otherwise win.
This argument is wearing thin. For one thing, in a low interest rate environment, any bank can afford to lend to key clients. For another, Deutsche has reduced its lending substantially over the past few years.
“A lot of people say Deutsche Bank buys its way into business, but we have been public about reducing our risk-weighted assets,” says David Fass, global co-head of debt products. “We have been number one in debt business from 2001 to 2004 and we have not been buying business. In fact, we have contracted our loan book by 45%.” Over the past year, it has reduced its loan exposure by 13% to e149 billion.
In any case, all of the bank’s lending is fully hedged. Its lending portfolio forms an important part of the asset-gathering that is essential for its credit derivatives business. It has shareholders to think about, so it does not lend irresponsibly.
Clearly the firm does still lend to what it perceives to be high-quality clients and clients likely to do business with the bank in future. But every bank does that.
So, setting aside Deutsche’s lending strategy, its strong performance in every main product group and in every key country in western Europe is an achievement. It is particularly impressive in the context of rivals persistently trying to lure away Deutsche talent to build their own operations. If a bank is shopping for European expertise, it will start at Deutsche Bank.
Perhaps the best illustration of the bank’s cross-product capabilities is the fact that it has been involved in every part of every major complex corporate restructuring of the past 12 months. It was the only bank in the debt, bonds and equity portion of the HeidelbergCement restructuring. The same goes for ABB, Invensys and France Télécom. That requires not just primary markets and distribution expertise, but also liability management and corporate finance skills.
Though it misses out on the best equities house award this year, Deutsche is not the heavily debt-focused house that it perhaps once was. In fact, it has a very healthy equities franchise that has largely successfully shielded itself from the slip-ups in block trades that have persisted across the region over the past year. Its equity-linked business is particularly strong. For distribution, some other firms might see its success at placing deals with hedge funds as a problem, because those investors are less likely to buy and hold. Deutsche, however, sees it as an advantage. It understands how important hedge funds now are and believes that will persist in the long term.
Deutsche has raised more primary equity than any other bank over the past 12 months. But its abilities in the secondary market are equally impressive. Autex figures show it is the biggest secondary market trading house in the UK, Germany, Italy, France and Portugal. The bank is also focusing on prime brokerage, transition management and equity derivatives, where it has one of the most comprehensive offerings.
Specifically in debt, the only house that can claim to rival the scope of Deutsche is Citigroup. Deutsche has been number one bookrunner of euro-denominated bonds every year since the currency was introduced. And it does this not by just picking the top issuers in each country but by covering each country in every sector, and across the credit spectrum. It also stays at the forefront of new developments, such as the European inflation-linked market.
And as in equities, it knows the primary market is only one part of the business. “There are going to be reasons for clients not to transact – be it the rate environment or IAS39,” says Hope Pascucci, the bank’s head of debt capital markets and the international client group in Europe. “It is our job to come up with creative solutions for the current environment. The liability management business is an example of this.”
Ask many primary debt or equities bankers where derivatives fit into their business and they claim not to know too much about that side of the bank. Deutsche’s bankers unequivocally state that they could not do their job without their colleagues in derivatives. The bank prices its loans off the credit derivatives curve. And once it puts together credit derivatives products for investors to use, whether they are standard single-name contracts, ABS packages of CDOs, or emerging-market credit derivatives, it can show its commitment to them by investing in them through Winchester Capital. Rajeev Misra, global head of credit trading, says: “We put our money at risk with that of the clients. And the clients appreciate that.”
For that kind of discipline, combined with its mature equity derivatives business and the high-quality FX risk management it provides to the biggest and most demanding clients in the market, it scoops the award for the best risk management house in western Europe.
In equities, UBS stands out for its first-rate research, which was recognized as the best in the market in the Thomson Extel survey again this year, and also for its flawless execution in new issues. That might sound like an obvious skill for a serious equities house, but mispriced block trades and bought deals were common in 2003 as firms bid too aggressively for deals when IPOs were scarce. Among the largest banks, UBS and Merrill Lynch always got it right.
High standards in execution are obviously critical for investors, as they do not want to buy stock that slumps immediately after launch. But it is also important to issuers that might want to come to market again soon. That could explain why Axa chose not to use any of its French national champions as the sole global coordinator and financial adviser in its redeemable rights issue last autumn, and chose UBS. It was an unusual deal, designed to finance the acquisition of US firm Mony, where the proceeds of the issue could be returned to investors if the deal were to fall through.
Other examples of UBS’s work include the $1 billion rights issue for AstraZeneca. UBS was sole bookrunner and it launched the deal at a tight discount to the UK share price, complete with an FX solution for the issuer, after an extremely discreet preparation phase. The bank also managed to list HHG on the London and Australian stock markets after its demerger from AMP just two days before Christmas. The bank says it was possibly the most difficult time to get such a complex deal away, but it worked.
And the bank’s global reach is improving, as the Pemex issue of bonds exchangeable into Repsol stock demonstrated in December. Such examples of quality work are scattered throughout western Europe.
In M&A, the pending merger between Aventis and Sanofi-Synthélabo will test the strengths of several leading firms, including Morgan Stanley, Goldman Sachs and Rothschild on the Aventis side and Merrill Lynch on the other. All of those banks, and JPMorgan besides, have done impressive work. Deutsche is also increasing its presence in M&A and becoming a competitor.
Among all those banks, Morgan Stanley’s shines through, especially in key markets such as the UK, France and Spain. It helped Iberdrola to fend off a hostile bid from Gas Natural. It also advised in the merger between Crédit Agricole and Crédit Lyonnais. More recently, it advised Amersham as GE sought to buy it.
M&A is one of the bank’s key areas, complemented by its equity franchise. As such, it has been able to maintain its capabilities in Europe despite the dearth of new deals. “We are committed for the long term to the region and to each of the markets,” says Paulo Pereira, head of European M&A. “We have not opened and closed offices through the cycle. One of the strong points of our culture is to show one firm to the client, and that is helped by the continuity of presence and individuals.”
State Street has developed a formidable presence in European investor services since it bought Deutsche Bank’s custody business early last year. But JPMorgan retains its dominant position. Its local focus on Europe is good, and it believes strongly in allowing clients to speak to staff in their local time zone and local language.
Like other large custodians, JPMorgan has identified the trend towards outsourcing, as demonstrated by new agreements to handle operations and administration for Isis Asset Management and Morley.
JPMorgan has managed to expand its custody business organically rather than through acquisitions, and this strategy is unlikely to change. “We never rule anything in or out, but we have had an organic growth strategy for Europe for a while now,” says Ramy Bourgi, head of European investor services. Key territories it is seeking to develop include Scandinavia and central and eastern Europe.
ABN Amro’s renewed focus on cash management is paying off, as Euromoney’s most recent cash management poll shows. The bank pulled itself up from third place in 2002 to first in 2003 as Europe’s biggest cash manager. This is impressive given the trend among multinationals towards centralizing treasury operations, which makes the market all the more competitive.
The bank differentiates itself through cross-border multi-currency pooling and netting, and by making clients’ cash work harder. It pays interest at market rates rather than internal benchmarks.
The bank is using technology well to offer its services across the region, and its decision to integrate cash management and working capital with wholesale banking has enabled it to sharpen customer service.
SG CIB does not pretend to be a global debt powerhouse. But it does know that three years after it merged its structured finance and capital markets businesses, its new model has really started to work.
Since 2000, the bank has dragged itself up the key European debt league tables from around the 15 to 20 mark to be a top-10 bank in each of its target products, including euro-denominated corporate and financial institution bonds and ABS.
It is now the leading bank for straight bonds and ABS in Spain, which was the first country to implement the integrated business model. It competes extremely closely with domestic rival BNP Paribas to be the second-biggest bank for French-denominated bonds. It has exploited the weakness of the German financial system to become the third-biggest bond house there. And it is starting to make progress in Italy, as its recent appointment as a super primary dealer for the treasury demonstrates.
That realignment was essential. Previously, SG was offering a fragmented service to issuers, with originators of different products competing with each other, or at least failing to communicate properly. Apart from a lack of bond mandates, that created image problems. “We were lacking recognition in the City and in the markets,” admits Olivier Khayat, the bank’s personable head of debt capital markets. “I have always considered that a bond issue is the cherry on the cake,” he adds. “In the UK, for example, we have always been strong in structured finance. But if a big company wants to do a bond issue… the name of the bank is important because it will be attached to the company for a while.”
Joining teams and giving new roles to staff is never easy, but it has been well received. “The go-ahead came from the management but the willingness to push it was there for a couple of years,” says Khayat. Now the firm has established enough credibility to start making high-profile hires, which is something it has been unable to do up to now. “They are coming to us because the platform is credible,” says Khayat.
