BEST BANK*
JPMorgan Chase
BEST DEBT HOUSE*
Lehman Brothers
BEST EQUITY HOUSE*
Merrill Lynch
BEST M&A HOUSE*
Goldman Sachs
BEST PROJECT FINANCE HOUSE
Goldman Sachs
BEST AT RISK MANAGEMENT
Deutsche Bank
BEST AT CASH MANAGEMENT
Citigroup
BEST AT INVESTOR SERVICES
State Street
*Also best in the US
US financial markets shuddered after the recent upheaval in the credit markets but overall the preceding 18 months were a good year for banking and investment banking. Lending picked up, though there remained more supply than demand for the most part. Private-equity, equity and corporate advisory businesses picked up and debt capital markets remained solid, even if new issuance was dominated by financial institutions; corporate credit quality continued to improve.
Earnings were, as a consequence, generally very good, with a few exceptions here and there. That brought an end to what some had believed would become a prolonged round of mergers among US financial institutions. Having started with Bank of America’s acquisition of FleetBoston in October 2003, and bolstered by the merger of JPMorgan Chase and Bank One announced in January 2004, a number of regional banks announced deals.
But others stayed out of the race. Whether Citigroup wants to add to its US retail franchise is a moot point right now, as it is banned from making any significant acquisitions by the Federal Reserve. Wachovia has been digesting the 2001 merger with First Union, although Wachovia was considered a candidate for linking up with JPMorgan Chase.
Richard Kovacevich, CEO of Wells Fargo, has been steadfast in his refusal to merge with another large bank, although he did buy 70 mutual funds with $34 million in assets under management from Strong Financial last summer.
A bigger trend has been to shed assets that are now regarded as offering too little growth potential to allow the parent to hit its return on equity and stock price targets. Citigroup sold its life insurance business to MetLife for $11.5 billion, American Express is spinning off its financial advisory business, and Morgan Stanley, in large part because of a public and acrimonious battle over strategy and leadership, is exploring spinning off its Discover credit card business. There has also been talk of Morgan Stanley spinning of its asset-management arm, and similar noises have been made about the business at Merrill Lynch and Citigroup.
The recent credit market upheaval might stem the positive news from several firms, and the next 12 months could prove volatile if fears about a housing bubble and a US economic slowdown do materialize.
One bank that has already announced that the second quarter hit its earnings is JPMorgan Chase, which takes the regional and US awards for best bank. President and COO Jamie Dimon warned last month that its trading earnings, to be announced in mid-July, will be the worst for some time.
That should not, though, detract from the progress the bank made in the previous 18 months. By merging with Bank One in the first half of last year the bank got a CEO-in-waiting, Dimon, whom investors respect. That deal also transformed the scope of the retail franchise. Chase’s retail bank has performed incredibly well in the past few years, and during 2001 and 2002 carried the poorly performing investment bank. With Bank One, Chase adds the lucrative Chicago and Illinois retail market to its portfolio and significantly improves its credit card offering.
The merger also bodes well for other parts of the commercial bank, such as cash management, where there was little overlap on product between the two banks, though often they dealt with the same clients. Some competitors talk of merger headaches there, but the group is pulling in new mandates and producing good returns.
The firm’s investment bank is somewhat more patchy in performance, as the warning on trading earnings for the second quarter shows. The equities division is still playing catch-up, especially in trading, but in some of the year’s high-profile products it has done well, most notably in leveraged finance and in M&A, where it was a contender for our north America award.
That goes again, though, together with the US award, to Goldman Sachs, the investment bank that courted controversy by advising on both sides of the New York Stock Exchange/Archipelago announced merger this year and the validity of the fairness opinion it and UBS provided to Gillette on its $57 billion planned purchase by Procter & Gamble, the biggest announced deal of the period. But it is still the bank every advisory house has to beat and the dominant player in the US market and throughout north America. Whether you look at the number of deals done or deal volume, in league tables of completed deals or those that have been announced, Goldman comes out top. In Canada, Merrill Lynch is the top M&A house by deal volume, but even here Goldman has a decent market share. Throughout north America, it has provided advisory services across a whole range of industry sectors in some of the most important completed deals of the year, a number of hostile and unsolicited transactions and provided some innovative combined advisory and financing packages.
Yet Goldman faces some stiff competition. Morgan Stanley has always proved a significant threat to its franchise. However, in the calendar year to date, Morgan Stanley is the top M&A adviser on announced deals in north America, having worked on $180.8 billion-worth of deals and 88 transactions, pushing Goldman into second place, an impressive achievement given all the turmoil and defections the bank has suffered in recent months concerning its leadership and direction of the entire organization. At this rate, Goldman could have a tough job retaining the top spot in north America this time next year.
Best equities house was a tough decision. Despite the turmoil of recent months, Morgan Stanley has had another good year as an underwriter of both equity and equity-linked deals, and as a trader and prime broker.
But this year’s winner, both for the US and north America, is Merrill Lynch. To some extent this is as much an award for improvement as it is for top-notch client service. The improvement has come, rapidly, in the two areas where Merrill has in recent years lagged its chief rivals, Morgan Stanley and Goldman Sachs, namely trading technology and prime brokerage. The firm has been investing heavily in both. In trading, the firm bought ABN Amro’s professional brokerage business in January 2004 and Pax Clearing, an options clearing business, later in the year, and has been spending to catch up in algorithmic trading.
The firm has also been hiring, taking some prime brokerage bankers from the two market leaders, Goldman Sachs and Morgan Stanley, over the past couple of years. Then last autumn the firm enticed Morgan Stanley trading head Rohit D’Souza to join as head of global equities trading. One of his main tasks is to ramp up Merrill’s low-touch and no-touch trading platforms.
Results are already evident. Its share of programme trading on NYSE, for example, has almost doubled in two years to about 7%.
It is in underwriting that the real force of Merrill’s franchise shows through, though. It is the only investment bank to have a significant presence in both the US and Canadian equity new-issue markets, was second only to Morgan Stanley by volume of IPOs it lead managed last year across the region, and top by number of mandates. It is also the dominant bank on IPOs with more than one bookrunner, emerging as the lead bank, with the mandate as stabilization agent, on 29 of its 39 deals.
Lehman Brothers takes the awards for best debt house for the region and the US this year. As ever, Citigroup controls a formidable franchise, present on so many of the deals and boasting a good trading desk and long-serving business heads. But Lehman has long defied the notion, largely put about by the commercial banks, that independent investment banks cannot be significant players in the high-grade new-issue market. In fact, all the main investment banks are proving that maxim false.
But Lehman always has. The list of deals the firm has been involved with is formidable, whether PG&E’s $6.7 billion multi-tranche deal in March 2004, various deals for ratings-challenged Ford and General Motors, deals for long-time client GE, and a whole raft of capital securities of varying currencies for financial institutions, not least the UK banks that have been very active issuers in the US since early 2004.
In addition to its underwriting prowess, Lehman is the top fixed-income sales and trading house according to both Institutional Investor and Greenwich, and has been Institutional Investor’s top-ranked research house for five years in succession.
Another of Lehman’s strengths is the mortgage-backed securities market. It has always been one of the top three players in the US, along with Bear Stearns and, via PaineWebber, UBS. In the past two years, Lehman has been consolidating its position, buying mortgage loan originators to the point where 55% or more of MBS deals it structures come from loans the bank owns.
The investment bank has also become a strong player in credit derivatives and structured credit. It’s not the biggest player, but has developed a reputation as a straight shooter, and as its second-quarter results indicate, possesses sturdy internal risk management processes.
The winner of best project finance house, a new regional award, is Goldman Sachs. It might be considered peculiar to make a bank without a formal project finance group house the winner in this speciality. But if any bank epitomizes how the US power business has changed, as well as how to make returns in this volatile market, it is Goldman Sachs. Goldman underwrites bonds, makes institutional loans, acts as a financial adviser and increasingly takes principal positions in acquisition deals.
Goldman has maintained its position in the wider investment banking world – and generated impressive profits – from trading. In energy it has used its power, oil, gas and coal trading capabilities to buy power assets, both physical plants and contracts, and to enhance capital-raising capabilities.
Power producer Calpine’s efforts to shore up its liquidity position draw heavily on Goldman’s experience in trading – it can offer hedges that counteract the volatile revenues that accompany selling electricity on spot markets. It has led institutional loans for Calpine, and Sempra and Riverstone’s purchase of the Coleto Creek coal-fired plant in Texas.
Goldman was one of the arrangers of the $2.875 billion note and bond issue that backed the acquisition by Blackstone Group, Hellman & Friedman, Kohlberg Kravis Roberts and Texas Pacific of the Texas Genco power portfolio – the largest non-utility power acquisition ever in the US. Goldman’s commodities division, J Aron, purchased some of the portfolio’s power.
Goldman has also taken steps into renewable energy as the part owner, with Shell, of the Three Winds portfolio, which raised $123 million from commercial banks in September 2004. It recently bought wind farm developer Zilkha, a step that players in the segment believe will enhance the credibility of wind power with financial institutions.
But Goldman is not merely a power house. It advised the city of Chicago on the sale of the Chicago Skyway toll road to a European operator, the largest such privatization in the US to date. If, as lenders hope, the private sector starts taking over more of America’s transport system, Goldman will be in line for a large chunk of that business. In energy, it will need to prove that it can survive the recent departure of power group head Doug Kimmelman, who has formed a new private-equity firm.
This year’s winner of the regional risk management house award is once again Deutsche Bank, which has built up a formidable presence in the north American markets across all major derivative products. It stands out for certain deals, though. One was for a US company buying a Canadian asset, which would expose it to both currency and oil and gas risk. Deutsche devised a hybrid product that was practicable before, but that the bank was now able to structure to take advantage of the liquidity of both markets and thus get a significant cost discount for the client.
Another was for a small microchip construction company on the west coast. It was part of a consortium that had won a mandate to build a microprocessor plant in eastern Germany. All those in the consortium were small $100 million companies that were finding it tough to put up $25 million of equity each ahead of building the $5 billion plant. Deutsche’s solution was to persuade the consortium companies to act as one, and create pseudo-equity. Deutsche would set up a second-lien loan to the group under a letter of credit from the bank. It was a simple solution to a complex issue for smaller companies. For its part, Deutsche sold on much of its risk to hedge funds looking to get exposure to tech company structured risk.
The firm has also started a muni bonds options business, something many of the traditional cash players, especially the local shops, cannot do. Yet with so many experiencing fiscal shortfalls, more creative solutions are a must for state and city treasurers. One structure Deutsche is already using enables European investors to buy US muni bonds, a product they normally cannot purchase as many are not mandated to acquire such tax-exempt bonds. Deutsche has devised a way to pass the tax-exempt status to US investors, and the credit risk to European investors.
Citigroup is the winner of the best regional cash management and payments award. Long a global force, Citi neglected the US market. It has been rectifying that recently, although rivals counter that Citi tends to have a flavour-of-the-month approach. That cannot account for the new mandates won in the past 12 months, most notably from some of the most demanding clients: the US departments of state and defence.
Part of Citi’s strength comes from the fact that it is not an established player, encumbered with older technologies, processes and mindsets. That’s not to knock the competition. Bank of America, JPMorgan Chase and Wachovia, for example, command great respect among their peers and clients.
Being able to offer digital services, rather than the older analogue model, saves both the bank and its customers time and money. According to global head of the business Paul Galant, Citi’s US cash management revenues are increasing 12% a year in a business that usually returns 3% at best.
What is really making Citi stand out, though, is its new treasury management system, TreasuryVision, which it introduced earlier this year in response to a request from PepsiCo for a system to integrate and monitor all its cash management requirements, across all banks, globally. The drinks company says the system is saving it $100 million a year. TreasuryVision is explained in more detail in the global awards section.
State Street wins the best regional investor services house award. It’s a hotly contested market, with JPMorgan Chase, Citigroup and Bank of New York putting up stiff competition. But State Street is still out in front, largely through first-mover advantage in the hot topic in investor services in the past couple of years: how to service hedge funds, and the Boston bank got in on the act with its acquisition of IFS.
State Street continues to lead in the more traditional investor services business as well, as characterized by its winning the mandate to service the $60 billion in assets of the Oregon State Treasury announced at the start of May. Earlier, in May, State Street won the mandate from Bank of America to service its mutual fund business, Columbia Management Group, which has $224 billion in assets.
