Shaping the business model of the future

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Amid a dynamic and evolving investment banking environment, in which the largest players are struggling, some more nimble operators are bucking the trend and achieving returns on equity comparable to before the financial crisis.

TD Securities pottery-600
iStock.com/Andrea Laurita

One of those outperformers is Canada’s TD Securities, the wholesale banking unit of TD Bank Group, which reported a rise in both net income and revenue in 2015 to produce a return on equity of 15.2%, considerably in excess of many of its larger rivals.

As many global banks have retreated from universal banking, TD has moved ahead, building on an established program of expansion that has created an integrated global model unencumbered by legacy portfolios or stranded costs.

“Global banks are being required to hold a huge amount of additional capital, which is causing them to make some very hard balance sheet decisions,” said Moti Jungreis, TD Securities’ Vice Chair and Head of Fixed Income, Currencies and Metals. “We aim to be flexible and benefit from a repricing when other banks have walked away.”

TD’s wholesale banking net income for 2015 was CA$873 million, an increase of CA$60 million, or 7%, compared with the previous year, amid higher trading revenue, a booming origination business and strong lending growth.

From a geographical perspective a significant element in its recent expansion has been the US, where a nascent retail offering a decade ago has grown into a fully-fledged corporate and investment bank, focused on a cross-section of institutional and corporate clients.

“The US is our number one growth market,” said Jungreis. “TD started with a retail focus and now we're building on that success and providing a more complete offering, growing a commercial and corporate business that delivers services including primary lending, derivatives, cash management and FX.”

Strong and robust

With market-leading franchises in fixed income, FX and metals, TD has established a sustainable business model built on strong risk discipline and robust capital and liquidity management. Meanwhile, as others have looked to step out, TD has leveraged the group’s balance sheet to grow market share, said Jungreis.

Across the investment banking industry the business line to have most struggled in the recent period is fixed income, currencies and commodities (FICC), with earnings across the 12 largest banks declining 9% to US$69.9bln in 2015, according to research firm Coalition’s IB Index, published in February. The second half was particularly weak, and that trend has extended into 2016, with many leading banks reporting one of the toughest first quarters for FICC on record.

Despite the general malaise, however, there were opportunities for those able to build on the right strategic orientation, and TD reported solid FICC earnings in 2015.

“FICC broadly met our expectations, and again that arose from being able to prioritise according to our capabilities and customers’ needs,” said John Moore, TD Securities’ Head of U.S. & International Fixed Income. “That means that outside Canada we were not in areas like distressed or high yield debt, but rather focused on investment grade issuance, flow derivatives and currencies.”

One reason for the bank’s outperformance was its ability to anticipate post-crisis trends. One such was the growth of the supranational, sub-sovereign and agency (SSA) sector, which has expanded from approximately US$200bln in 2007 to an expected US$650bln this year. TD Securities is ranked in the top 5 global bookrunners for SSA in US dollars and among the top 10 for all SSA issuance.

Another area of FICC that performed well since the beginning of 2015 has been FX, where a return to volatility in the first half of last year led to renewed investor appetite for hedging and speculation.

“We benefitted last year from increased currency volatility, as investors looked to generate alpha, often through overlay strategies on underlying portfolios,” said Michael Twaits, TD Securities’ Head of Foreign Exchange and Metals. “That was a boost to the business, which we have been looking to grow alongside our primary market activities.”

Demand for FX products from spot transactions to options, swaps and forwards rose sharply, with clients reassured by TD’s solid Aa1 (Moody’s) / AA- (S&P) credit rating, stable balance sheet and product capabilities.

Cream of the crop

As banks have found it increasingly tough to hire the best graduates, amid intense competition from starts up and technology companies, TD has made efforts to ensure that it continues to attract the cream of the crop.

“In trading and sales we are fortunate to have some of the best minds in the business,” Jungreis said. “We have also been helped by the fact that TD has grown through the crisis, enabling us to offer a very positive career opportunity.”

One product area that has been broadly decimated in the recent period is commodities, with slowing Chinese growth and excess energy production leading to sharp price moves and challenges for producers and downstream operators.

TD entered the commodities space in 2009 and has managed the business through the downturn. However, it does not see the recent volatility as a reason to step away, and is a market making member of the London Bullion Market Association and contributor to groups setting gold and silver benchmarks.

“It’s a relatively embryonic business for us that complements our activities in investment banking and equity capital markets,” said Twaits.  “We have two aspects of the strategy, which is to provide hedging solutions to the industry and flow products to investment managers, and we are committed for the long term, even as other banks pull out.”

As the industry gets set for the next stage of regulatory change and restructuring, TD has shown it is ready to build on its recent outperformance, based on a global client proposition, outstanding service and a sustainable business model that works.