North American Regional Awards for Excellence

North America has been firmly at the centre of the global financial crisis. From March 2008 to the end of April 2009, it lost some of its most revered banking institutions as asset prices continued to decline. Bear Stearns, Lehman Brothers, Merrill Lynch and Washington Mutual, to name but a few, went bankrupt or were swallowed up by competitors, while those swallowing them faced their own issues. It is hard to believe that those banks involved in high-profile mergers and acquisitions, or continually concerned by falling share prices or government intervention, could fully focus on managing their clients’ risk simultaneously. This year’s winners in North America reflect those banks that stayed open for business while others closed their doors, providing solutions for clients that were suffering from their own internal crises.

TD Bank is the first truly North American bank and so hands-down wins the title of best bank in the region. Facilitated by the acquisition of Commerce Bank at the end of March 2008, TD now has 1,108 branches in Canada and 1,018 in the US. No other bank can boast that balanced approach to both countries. Against a difficult backdrop in the US and to a lesser extent Canada, TD has successfully integrated Commerce Bank TD Banknorth into TD Bank to have now just one brand across the continent. For the three months ended January 2009, US personal and commercial banking generated more than double the net income for the same period 12 months earlier. Continuing its focus on Canada, net income in personal and commercial banking for the quarter was $584 million, down only 2% from the same quarter ending January 2008, although revenues were up.

By the end of April this year, TD Bank was the second-largest Canadian bank by both deposits and assets, and sixth-largest with its US peers for both.

The bank’s success is on two levels. First, the culture of Commerce Bank has fitted well with TD Bank, which is seen as a modern and friendly bank. The US retail banking system is known to be particularly onerous but Commerce, nurtured by TD Bank, offers 50% longer opening hours than its competitors in the US and Canada, welcomes dogs into its branches, and provides entertainment for children and prizes for coin exchanges.

That might seem gimmicky coming from another bank but TD Bank is extremely conservative. One of only seven banks to have a triple-A rating on the New York Stock Exchange, it had credit-crisis write-downs of just $525 million. Its tier 1 capital ratio was 10.1% at the end of January this year. Furthermore, its 2008 return on risk-weighted assets was 2.09%, compared with an average 1.68% among the Canadian banks and 0.66% among the US banks. Being so well capitalized, it has attracted both retail and commercial customers, says Colleen Johnston, CFO of TD Bank. “Clients know they are dealing with a stable and well-run institution, and that has been incredibly positive for our brand.” Just being there over 2008 to 2009 seems to be the winning trend this year. TD’s philosophy for its commercial customers on both sides of the border has been “don’t make bad loans in good times, and make good loans in bad times”.

A further advantage of TD Bank’s stability is that it has allowed the bank to invest and grow at a time when its competitors are slowing down or cutting back. Johnston says: “Internally we talk about the recessionary environment and we know that we will be in an environment where credit losses are higher, but we have decided to keep growing. It is important to emerge from the economic crisis with business momentum on our side.” Indeed TD is still adding branches in Canada and the US, and increasing the number of client advisers.

In pure US banking, the period assessed for awards was one tarnished by dissatisfaction with banks that took risks in good times, only to have to take taxpayers’ money in bad times. For Minneapolis-headquartered US Bancorp, that was not the case. In the past the bank has been criticized for being prudent and, frankly, quite boring. “We were simple and steady, and I never imagined there would be a time when that was appealing to investors,” says its chairman, president and chief executive, Richard Davis. But March last year through to April this year was that time, and the catapulting of US Bancorp into the limelight for its success as a safe haven and reputation as a bank with integrity is likely to maintain its elevated status. US Bank (the banking business of US Bancorp) is now the sixth-largest bank in the country, with 2,791 branches, almost 58,000 employees and 15.8 million customers at the end of 2008. Davis says that a year ago a large New York company would have had a $1 billion line of credit with six or so banks, among which US Bank would not even be considered, nor would have pitched for. “Now some of those banks have gone, such a company is turning to us when the line of credit is due,” he says. It would be unfair to say this is just because competition has fallen away. US Bancorp has been seen as a safe pair of hands with a balance sheet to use, and in turbulent times companies have needed banks that can lend when loans are due for renewal. Indeed, while the bank accepted Tarp money, Davis made clear that it was not required to shore up capital. It was paid back in June.

Davis has been turning the bank’s reputation to its advantage by offering lines of credit as a sort of part one of a relationship that will result in a firm increasing its deposits with the bank or using its cash management capabilities. It’s a relationship that companies are happy to develop in return for credit, says Davis. Momentum is growing. Over the first quarter of 2009, commercial loans grew 8.6% faster than in the same period in 2008. Deposits grew 12.3% (22.7% including acquisition deposits) – compared with 12.5% growth over the whole of 2008. On the retail side, the bank’s perceived strong position resulted in a record first quarter in mortgage loan applications.

Not caught up in investment banking or insurance-related woes, US Bancorp steadily expanded over 2008 and 2009. In June last year, the group acquired Mellon First Business Bank. In November it acquired Downey Savings and Loans and PPF Bank & Trust from the Federal Deposit Insurance Corp, with built-in provisions to limit credit losses. Those transactions added 213 new banking locations, making it the fourth-largest branch network in California. Davis says small acquisitions opportunities will continue to be looked at. Organic branch expansion was also facilitated by a tie-up with Smith’s food and drug stores. US Bank now has the nation’s largest network of in-store and on-site branches, giving it access to 10 million prospective customers weekly. Warren Buffett is putting his money on the bank, having increased his stake in its shares in May.

Investment banking impact

Goldman Sachs is now a bank holding company alongside Morgan Stanley, marking the end of an era in investment banking, but has there been an impact on its clients? Apparently not. Clients report that they have had greater help from Goldman Sachs than from other surviving financial institutions, and more so than ever over the past 12 months. Gary Cohn, president and COO of the firm, says: “We know our book value every night and we know exactly what our positions are every day. That means we can be out there with clients instead of having to be internally focused.” The number of clients the firm assisted in equity, debt and M&A transactions last year and early this year supports his statement.

In equities, Goldman Sachs was the bookrunner of choice for critical financial institution offerings. It was sole bookrunner to GE’s record $15 billion equity offering and joint bookrunner on offerings by Wells Fargo, Wachovia and WaMu last year. State Street, Lazard and Greenhill were yet more institutions that turned to Goldman Sachs. In April last year, Goldman Sachs was the sole financial adviser and sole placement agent for the $7 billion private placement for National City.

In debt markets, Goldman Sachs provided solutions to clients in structured finance. In the fourth quarter of 2008 and the first quarter of 2009, Goldman Sachs participated as a manager or principal in nearly 40% of all structured finance transactions. Such deals included Ford’s $2.95 billion Talf-eligible deals, a $400 million aircraft-backed senior secured deal for Southwest Airlines, and a $150 million catastrophe bond – the first of three cat bonds lead managed by Goldman Sachs in the first quarter. One of the biggest pointers to confidence in Goldman Sachs’ ability to get debt deals right is the number of first-time US dollar bond issuers that selected the investment bank as a lead in turbulent times.

Finally, in M&A Goldman Sachs was the number one ranked North American M&A adviser over the period, advising on nine of the 10 largest transactions across a range of sectors. The investment bank advised Schering-Plough on its planned acquisition by Merck for $45.9 billion. It also advised Wachovia on its takeover by Wells Fargo, and Wrigley on its acquisition by Mars.

In Canada, one investment bank, RBC Capital Markets, stands out above the crowd. The Canadian investment banks, thanks to a well-regulated and conservative banking system, have largely avoided the pitfalls of their US counterparts, and this year RBC pulled out all the stops to use its position to provide investment banking capabilities to Canadian companies and foreign companies wishing to access Canada. The investment bank ranks top of the league tables in debt, equity and M&A deals in the country. In equities, RBC was bookrunner on 48 transactions and led the Canadian equity capital markets with a 22% overall market share of new issues. During the period, RBC raised C$12 billion ($10.5 billion) for Canadian equity issuers and was involved in three of the top five transactions for the period, including two follow-on offerings for TransCanada Corporation. In debt, RBC has an overall market share of 23% – this is 5% more than TD, which ranks second. Finally in M&A, RBC advised on six of the 10 largest Canadian target M&A transactions, including the C$22.5 billion acquisition of Petro-Canada by Suncor Energy. The firm also advised on two of the three largest M&A transactions by a Canadian acquirer outside Canada – one of which was Agrium’s $3 billion cross-border hostile bid to acquire CF Industries.

If North American investment banks have been accused of being side-tracked by Tarp money, or by becoming banks, or by dealing with acquisitions, Deutsche Bank has proved that being undistracted pays off. The investment bank gained ground in both the debt and equity markets as North American institutions turned to it in sticky times. “There was never a day we were so distracted by a stock price plunge, an analyst downgrade or a merger that we couldn’t keep up with customer demand,” says Fred Brettschneider, head of global markets for the Americas. “There were many days when the number of banks transacting dwindled to just a few. We were always among the few transacting.”

The ability to focus enabled the bank to provide advice to borrowers on when and where to raise capital. When the credit market began to revive in October, Deutsche Bank was one of the first to call its return, arranging the first jumbo deal in many weeks – IBM’s $4 billion financing. Up to that point the market had been dominated by small-scale, super-safe issuers. The IBM transaction came in the midst of a sharp fall in the Dow Jones and gave issuers confidence. Raj Bhattacharyya, co-head of debt capital markets and corporate coverage in North America, says: “Several companies called me to express the importance of having such a prestigious issuer as IBM reopen the market.”

When large deals contain a handful of arrangers and bookrunners, it is often hard to judge which bank was indeed behind the transaction. One gauge is to look to banks that are involved in repeat transactions. In 2008, Deutsche was the lead choice of underwriter for GE Capital’s unsecured issuance. Over the past three years, Deutsche Bank has claimed 15.5% of IBM’s deals, ranking first among underwriters.

One of the clear advantages Deutsche has over some of its North American peers is its expertise across a range of currencies. North American borrowers turned to the bank to assist then in issuing in non-domestic currencies. Bank of America, for example, appointed the bank as bookrunner for its sterling deal in July 2008. Deutsche was a lead on AT&T’s deal in sterling, which priced 60 basis points better than it would had it been issued in dollars.

In secondary markets, Deutsche has also made gains. The firm ranks fourth in US bond trading, up from 11th in 2007 and 2008. The bank was also the second-largest market maker of US credit default swaps, and number one in US asset-backed securities, having executed about 25% of all ABS trades over the past 12 months.

As with debt, Deutsche succeeded in having the largest market share gains in equities in North America from March 2008 to the end of March 2009 across both primary and secondary markets. The bank’s ETF business has tripled. In US cash equity trading, its market share almost doubled to 7.3%, according to McLagan. In US convertibles, the bank is the number one trader.

Big story

The big story in equity markets aside from banks raising money to shore up balance sheets was Reits. Alongside Bank of America/Merrill Lynch, Deutsche Bank dominated the Reits market. Most recently, Deutsche acted as joint bookrunner on ProLogis’s $1.2 billion follow-on offering – the largest Reit equity follow-on ever.

In prime services, Deutsche Bank’s ability to provide liquidity while other firms have closed their doors or exited the business has resulted in the bank having one of the two most profitable prime businesses globally. While many prime brokers cut back severely in September/October last year, withdrawing credit and rigorously enforcing NAV triggers, or even stopping service for fixed-income funds, Deutsche did not. The result was that 200 clients have joined Deutsche since September 2008, and it is now prime broker to 75% of the world’s top 200 funds.

Being open all year round means that Deutsche Bank has been able to focus on its clients’ risk, and managing it, rather than being caught up managing its own, earning it the title of best risk management house in North America once again. Across all asset classes the bank has been rigorous in identifying new strategies and products to help clients through volatile markets. In the second half of 2008, the bank completed a multi-billion dollar hedge for a global insurance company that helped it to protect itself against volatility embedded in its equity-indexed annuities book. The bank was one of the few to consistently make prices in US equity options through 2008 and 2009, and did some significant trades for clients in this area. In November, the bank helped one client unwind a $10 million vega in one clip. In the last quarter of 2008, the bank also helped a wide range of clients reduce their equity exposures using index options and sector options. In the last quarter of 2008, the firm designed a new hedging strategy called P&L Engineering that involves in-depth analysis of the client’s entire portfolio, an assessment of how much it could move under different scenarios and which hedge would be the most cost-effective given the client’s own risk parameters and market view.

In debt markets, Deutsche’s team successfully managed risk in all asset classes. In some cases, managing risk meant simply being able to buy a client’s risky paper, says Greg Lippmann, global head of ABS and CDO trading and syndicate. “We worked with clients to match what they wanted to sell, including traders who were looking to cover short positions. People say that the ABS market is closed but since November last year we have traded with over 200 institutions.”

In FX, Deutsche Bank is the global leader, and its expertise means that the bank has helped clients navigate the volatile FX markets as the US dollar has swung back and forth against the euro. On the research side, the bank advised clients to sell the euro against the US dollar in June, just before the summer sell-off. It also developed the Flex Folio hedge that enables companies to protect themselves against mark-to-market losses on FX hedges – the first product of its kind.

The award for best FX house in North America this year, however, goes to Barclays Capital. Its Barx platform offered clients uninterrupted service through a period of unprecedented market volatility. On the options side, Barclays had designed its electronic systems to stream live prices and not just offer request-for-quote execution (RFQs). That was an advantage in stable times, but in August 2007 the bank realized that in times of volatility RFQs would be essential. Adding the facility to the system proved invaluable over September and October last year as it enabled Barclays’ e-offering to continue business as usual. “When clients wanted to mitigate risk, we were always there to provide a solution,” says Gregg Chow, managing director and co-head of foreign exchange sales, North America. On the technology side, Barclays also has one of the best platforms on the street, and has received industry accolades for its click-and-deal capabilities across currencies and options.

Viewing FX as an asset class and not just a hedging overlay, Barclays has been increasing its product set to fit clients and has, as a result, increased its US activity. Barclays Capital FX Adaptive Trend Index, launched in September 2008, also enables investors to profit from trending behaviour in G10 currencies, and in high-volatility environments it takes counter-trend positions. The trade-weighted dollar indices launched in January this year enable investors to go long or short the US dollar against a trade-weighted basket of 10 currencies that represent the largest trading partners with the US.

Slow markets

The M&A market slowed dramatically over 2008 and early 2009 but JPMorgan managed to advise on 143 deals with a market share of 17.6%, according to Dealogic. Among the more complex transactions of 2008 in North America, JPMorgan was the exclusive financial adviser to Landmark Communications on its $3.5 billion sale of the Weather Channel Companies to a consortium of NBC Universal, Bain Capital and Blackstone. Unsurprisingly, JPMorgan was deemed the best to advise Wells Fargo on its $13 billion acquisition of Wachovia. The deal was the largest bank/thrift transaction by assets ever completed.

On other large deals, JPMorgan was lead financial adviser to Pfizer on its $68 billion acquisition of Wyeth, was financial adviser to Hewlett-Packard on its $13 billion acquisition of Electronic Data Systems, and in utilities was financial adviser to Exelon Corporation on its $13 billion merger with Public Service Enterprise Group. Spanning the power, financial, technology and consumer sectors, JPMorgan has proved itself an M&A house of diverse expertise. Its further versatility was evidenced in InBev’s $60 billion acquisition of Anheuser-Busch. JPMorgan was the only bank on the deal to provide services across all aspects of the transaction – advisory, financing and ratings advisory.

In project finance, a market primarily funded by bank loans over the past two to three years, transactions have been increasingly getting done by banks that not only have capabilities in banking and loans but also in capital markets. Société Générale Corporate and Investment Banking (SG CIB), with its ability to provide financing on both sides, became a key player in 2008 and 2009 in the North American market. In September 2008, in the midst of the financial crisis, the bank successfully positioned the Enbridge Southern Lights Pipeline transaction in the market. The project will transport diluent from refineries and supply centres in the Chicago area to producers in oil-producing regions in western Canada. As demand for diluent outstrips local supply, the project was crucial to the development of fast-growing western Canadian crude oil production. SG CIB was joint lead arranger with RBC Capital Markets on the $2.2 billion project with a complex $1.7 billion debt package. Just two weeks after the Lehman bankruptcy, the deal was oversubscribed.

SG CIB was also involved in landmark availability payment based public-private partnerships in Canada and the US. It acted as lead arranger on the C$1.9 billion project for a section of the A-30 road on the south shore of Montreal. In March this year, SG CIB also acted as lead arranger and bookrunner for the closing project to finance the I-595 corridor in Florida, consisting of three debt tranches. It was the first availability payment based PPP in the US, and is likely to stand as a model for future PPP transactions in the country.

Distractions

Citi was distracted on many counts over 2008 and 2009, and still is, but in cash management it has remained extremely focused. The budget for global transaction services, in which business group cash management sits, is more than $1 billion. When Vikram Pandit was making cuts across business lines, he went the other way with GTS, allocating it $100 million more.

Heading its North American push is Julie Monaco, who joined in 2007. Where there had been no region head previously, Monaco has made every effort to home in and build the business. Those efforts are clearly paying off. No other cash management house in North America can boast the calibre of mandates won by Citi over 2008 and early 2009. In the commercial cards business last year, Citi implemented a new travel and entertainment card programme for the US Department of Defense – the largest single commercial card deal ever. In less than one year, Citi developed the infrastructure to support 1.3 million cardholders (accounting for 61% of government-wide travel spending) across 25 agencies, 45 countries, 32 currencies and 20 languages.

In addition, Citi launched a new financial supply chain solution with partner Ariba that combines electronic payments, electronic invoice automation and working capital solutions. The procure-to-pay solution was crucial in winning a mandate from Kimberly Clark.

For those who question whether Citi can really be as committed as it claims, Monaco points to the figures. Over the past 12 months, Citi has had a win ratio of 83%. Revenue growth for GTS is 30% and net income growth is at 47%. Growth in North American client deposits was up 34% in the fourth quarter of 2008 compared with the same period in 2007.