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Foreign Exchange

Citi’s punchy pricing leaves mark on real money: can it be sustained?

When EuromoneyFXNews asks one of the world’s largest real-money investors what the three most important characteristics are in an ideal execution counterparty, the fund manager replies: “Pricing, pricing and pricing.”

While this might be taking a slightly narrow perspective on the overall FX product offering, it is clear, from the performance of banks in the Euromoney FX survey, that price has played a major part in the reordering of the rankings of trading volumes with real-money investors. It’s a sector that is very much in focus for FX banks, at a time when hedge funds are losing assets under management whilst real money is taking them in. Volume growth in 2012 was up 28%, outpacing that of hedge funds and banks, which make up the three-largest client sectors.

During 2011, Citi made dramatic strides with real-money investors, as its ranking moved from fifth to first in the 12-month period. It’s something of a comeback, when one considers the bank was real money’s number-two counterparty in 2007.

Citi managed to dislodge Deutsche Bank as the dominant force with real-money investors ¬– unlike in the FX survey as a whole – almost doubling its market share.

However, all the banks in the top 10 of the Euromoney FX Survey saw an increase in volumes, with the number of institutions reporting their trading numbers rising from 998 last year to 1,120. Overall reported volumes rose from $25.5 trillion to $32.7 trillion.

 Real money market share of top five FX banks

 
 Source: Euromoney Market Data

Citi’s improvement can be put down to two key factors. The aggressive pricing of short-dated swaps, which the bank has steadfastly maintained has been profitable, and investment in technology and people.

Alex Jackson, head of investor sales, Europe at Citi, says that the bank’s performance is the result of a long-term plan to invest in technology and in people to deliver its strategy of becoming number one in both revenues and volumes across the market.

He says, in the past, the bank has probably been underrated in real money, particularly in western Europe, which makes up 53% of global real-money volume. Citi rose from sixth position to first and more than doubled its volumes to $2.6 trillion.

“This is the result of really intensive sales coverage and extremely good client relationships,” says Jackson. “You are seeing some of the fruits of our making sure we have the right people against the right clients.”

However, while the bank did move the dial on it swaps business with real money, moving from sixth to first, it also made a comparable leap in spot volumes, almost doubling its turnover to $2.1 trillion and climbing from fourth to first place.

E-trading connections

Jackson says the bank’s investment in technology is paying off – it launched its Velocity single-dealer platform (SDP) in 2010, and early in January 2012 released its successor Velocity 2.0. He says while bank and the leveraged clients are more prolific users of SDPs, a substantial number of real-money clients use Velocity.

In any case, it is not just the SDP that is driving electronic volumes at Citi, with Jackson maintaining that the bank’s traditional strength in multi-bank channels has also boosted market share.

“We have been able to significantly grow our electronic market share by connecting to all the major relevant distribution channels,” says Jackson. “We are constantly looking at which channels to connect to next.”

Real-money investors are well-entrenched with multi-dealer platforms, and it remains their venue of choice. Indeed, in terms of how real-money investors qualitatively rank their counterparties, the banks who work most enthusiastically with them will also be rewarded, say fund managers.

At the same time, market insight and direct contact with traders and sales people, particularly on large volume trades, still has a main role to play.

“There is still a need for relationship-driven transactions and that sort of depth of knowledge of how a transaction should work, that a machine can’t always accommodate,” says one London-based asset manager.

Creditworthiness

Another key element in the real-money paradigm is of credit quality of counterparty, which in the first instance gives a bank a seat at the real-money table. Citi is a prime example here, where it was hit by the financial crisis and rating downgrades. Its improved rating in recent years, and its aggressive strategy towards pricing, has led to its improved performance.

The question now is whether its pole position is sustainable, given recent events, say investors. Last month, Citi was among 15 banks which had their credit ratings cut by Moody’s Investors Service. It now stands two levels above junk status, making it one of the weaker-rated banks among the leading FX counterparties.

 Credit ratings of top five FX banks

 

Australian and Canadian banks, thanks to the relative resilience of their domestic economies and their credit ratings, also made their mark.

Among the top five most-improved banks with real-money accounts are two Australian banks and one Canadian bank, a reflection of the increasing concerns over the quality of banks’ balance sheets among FX clients.

Australian and Canadian banks have emerged from the financial crisis in better shape than most of their peers. Australia, thanks to its position as a gateway into Asia – particularly China – and the relative strength of the country’s economy is in an especially healthy position.

Indeed, National Australia Bank was the most improved with real-money clients, with volumes up 166.56% last year, while Commonwealth Bank of Australia was second with a rise of 125.27%. Canada’s Bank of Montreal, whose volumes climbed 84.43% was fifth most-improved with the sector.

Kieran Salter, global head of FX at Commonwealth Bank of Australia (CBA), says the strength of the Australian economy, as well as the strength of its financial institutions, has helped raise the profile of Australian banks on the global stage.

He says CBA, which has started a drive to increase its offshore FX business, has a legacy of traditionally being strong domestically with real-money accounts.

“It is a legacy we are very appreciative of, as it has served CBA exceptionally well as we have increased our marketing and growth offshore,” says Salter.

“It offers an excellent point of reference for potential clients considering doing business with CBA.”

Markets like Australasia, for example, will only continue to grow as the real-money sector outgrows its domestic asset markets and seeks to deploy more capital in foreign assets – Australasia accounts for 3.7% of global real-money volumes, while only 1.9% of global FX volume.

The chasing pack

Outside the top five, Credit Suisse (CS) was one of the main winners with real-money accounts, rising from 11th to seventh and taking its market share from 3.4% to 6.1%. The Swiss bank, which had the fourth most-improved volumes of any bank with real-money accounts, more than doubled its overall volumes with the sector, taking them to $2.2 trillion.

CS was particularly successful with large customers, rising from 13th to sixth with client accounts that trade more than $250 billion per year, almost doubling its market share with the sub-sector to 7.9%.

CS made substantial headway in the US, more than doubling its volume and almost doubling its market share as it climbed from 10th to sixth in the region. Japan was another highlight, with the establishment of a dedicated sales team sending CS from 18th to third with real-money accounts, taking its market share from under 1% to more than 9%.

CS, which has traditionally been focused on hedge fund clients, says this year’s results are a culmination of a multi-year effort to diversify its client base.

Credit Suisse volume breakdown by institution type - 2011

 
 Source: Euromoney Market Data

 Credit Suisse volume breakdown by institution type - 2012

 
 Source: Euromoney Market Data

Indeed, the bank won the award for most-improved bank with real-money clients in 2009, and after two years of consolidation, Braden Howarth, EMEA head GCEM sales at Credit Suisse, says the bank is starting to see the fruits of its labour.

He says there is no great secret to the bank’s success. It is, he says, a result of focusing on existing accounts with assets of more than $50 billion and doing more business with them, in addition to bringing new accounts on board.

“Over time, we’ve looked at market intelligence and studied client data to ascertain our key gaps,” says Howarth.

“It seemed obvious we needed to have a deeper footprint with existing accounts and to bring on new ones. So we just put in place a very systematic way of going through that.”

CS says it has also enjoyed success with real-money accounts due to its client advisory service group, CAG, which offers real-money accounts transaction cost analysis (TCA) and also third-party delivery of restricted onshore currencies.

With the increased focus on TCA after high-profile law suits in the US against traditional custodian banks, CS says the service has helped it gain a much bigger foothold with European asset managers in particular.

“It’s moving a number of big players away from their custodian banks towards us,” says Howarth. “We have had two or three very large wins in the last 12 months.”

Real-money specialists

Another top performer was State Street, a bank that has been traditionally seen as a custodian, or trust bank.

State Street rose from 15th to ninth with real-money clients, and was the third most-improved bank with the sector.

Guy Kirby, global head of sales at State Street, finds the result unsurprising. Instead, he believes last year’s result, which put State Street out of the top 10 for the first time since 2004, was an aberration.

Kirby is keen to distance State Street from other custodian banks, saying it has been an innovator in FX for some time. It is the level of service the bank offers its client base across the globe, not the fact they are custodians that drives business, he says.

“We tend to find that real money clients want to deal with us because of the value-added services we provide, regardless of whether we’re custodians or not,” says Kirby.

Real money is increasingly looking like a key battleground. The top five banks continue to jostle for position, traditionally hedge-fund-orientated houses are making inroads, while the Australian and Canadians are leveraging their healthier balance sheets.

The good news is that the sector continues to grow and should continue to throw up opportunities as the pace of the globalization of real-money asset allocation picks up.



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