FX poll 2000: Deutsche Bank's great victory


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For 20 years, ever since Euromoney began its annual foreign exchange surveys in 1979, Citigroup came top. Now Deutsche Bank has dislodged it by a convincing margin. While critics accuse Deutsche of buying its way into the business with huge salaries, the real reason is its global markets model that brings together commercial and investment banking. Over the past year interbank forex flows fell while M&A and institutional business grew, favouring investment banks and those that combine both functions. Philip Moore reports; research by Andrew Newby.

Euromoney FX poll 2000: Deutsche topples Citi 

2000 FX poll results tablesFX Poll methodology

The banker who says he is "gobsmacked" by Deutsche Bank's success in this year's annual foreign exchange poll ought to have read Euromoney in 1991. While a report then dismissed the German and Swiss banks as being "still basically niche players with a second-tier overall reputation", it also warned of an important shift of power within foreign exchange dealing rooms. "The long-term results," we forecast, "will be a redistribution of power towards the Europeans at the expense of the US commercial banks."

It has taken nine years for this forecast to be realized, and it is still only partly accurate. Although Bank of America has dropped out of the top 10 this year, Citigroup and the old Chemical Bank (reinvented within the Chase empire) remain formidable players, and have both increased their market share in 2000.

The problem is that neither of these banks has expanded its share half as much as has Deutsche Bank. And while some observers claim not to be surprised by the German bank's triumph this year, the margin of its victory - its total share has risen from 7.12% to 12.53% in the space of a year - gets the attention of most.

"For various reasons I don't think that Citibank will be desperately surprised to have been knocked off the top," says a London-based headhunter who has been tracking personnel movements within the market for a decade. "But if you're telling me that Deutsche has won by a mile then I would certainly be surprised... At the end of the day, a lot of it comes down to money. People at Deutsche will almost certainly be paid better than those at Citibank."

This reaction greets most Deutsche success or initiatives. In recent years it has become standard practice for the bank's competitors - in foreign exchange, the Euromarkets or equities - to say that the bank has bludgeoned its way to the top by writing cheques. "If you gave me a cheque for $20 million," says one, "I would be top of your poll this time next year. Whether or not it would be worth the investment in terms of shareholder value is much more debatable."

Buying the best

Deutsche certainly pays well for the right people. When Edson Mitchell was lured away from Merrill Lynch in 1995 to build Deutsche's global markets operation (of which forex is now an integral part) he wasn't motivated by a fascination with German culture or history. And Deutsche is happy to concede that the construction of a world-beating team was not something that could be done on the cheap.

"Is there any doubt that back in 1995 and 1996 we were paying a premium to hire the best people from the established investment banks?" asks Anshu Jain, managing director and global head of the institutional client group, who left Merrill Lynch with Mitchell. "Of course there isn't. We were talking about attracting world class professionals."

But the hiring spree of the mid 1990s, Jain insists, was an unavoidable staging post in a market cycle, rather than a blueprint that has remained entrenched within the bank ever since. "Over the last 12 months a number of the US investment banks have hired people from Deutsche Bank at a 25% to 100% premium," says Jain. "But many more have stayed here, even though they were offered packages well above what we were paying them."

Hal Herron, Deutsche's London-based managing director and head of global foreign exchange, is adamant that the notion of his department indiscriminately throwing money at the development of the franchise is untrue. "I categorically refute the suggestion that Deutsche Bank is spending money simply to buy market share," he says. "We are building a sustainable business based on long-term client relationships, and the figures speak for themselves. Our profits rose sharply in 1999 which was a difficult year in which many of our competitors saw their revenues decline, let alone their profits."

The idea that the cheque book alone has propelled Deutsche from nowhere to top spot in such a short space of time is clearly wrong. Plenty of banks have spent millions and failed - look no further than Rabobank's ill-fated venture of the last two years, staffed mainly, by coincidence with ex-Deutsche staffers.

As recently as 1995, Deutsche did not feature in the top 20 by market share in Euromoney's annual poll. Nor, did it make the top two in its Frankfurt backyard, limping in third behind Dresdner and BHF Bank. The obvious response for a player with an indiscriminate cheque book would have been an aggressive raid on the commercial banking leaders of the day. Instead, Deutsche Bank poached from investment banks such as Merrill Lynch, which itself had not appeared in the top 20 in 1994 or 1995.

Unprecedented model

Easy to understand today, at the time the strategy was bold, unprecedented and forward-looking. "As early as 1996," says Jain, "the distribution effort we put into place was based on a model that did not exist anywhere else on the Street." The philosophy underpinning the model was that the global markets division encompassed nine product lines broadly divided into two sub-sectors. One of these, which Jain describes as the bank's calling card franchise, consisted of products that were becoming increasingly commoditized such as forex, money markets and government bonds. The other was made up of more specialized products spanning emerging markets to structured credits.

The challenge was to pull the two together as a means of providing all-round client services and promoting cross-selling of products. "The key difference was that virtually every one of our competitors at the time pursued a model in which each of these businesses was run independently and almost in competition with one another," says Jain.

Establishing a game-plan of integrating commercial and investment-banking functions was one thing. Putting the plan into practice was quite another. The strategy was fraught with potential hazards and Jain admits that colleagues were sceptical when he, Mitchell and others staked their careers on it in the mid 1990s. Among the risks was the potential for culture clashes between individual members of the group, and the danger that specialist expertise would be diluted in pursuit of generalist coverage.

It was recognition of these risks, in the context of an increasingly commoditized market, that led Deutsche from day one to emphasize the provision of value-added services to its clients.

"All foreign exchange departments have salespeople and traders," says Rashid Hoosenally, head of European foreign exchange sales, "but only a few have something in-between the two as we do. We call ours global risk strategists and they account for about 10% of our sales force in Europe, which is an unusually high proportion. Their role is exclusively to structure risk-strategy solutions for clients rather than to generate hard revenue for the bank."

The search for the provision of added value in foreign exchange has been manifested, adds Hoosenally, in an extensive programme of client education. "I would estimate that over the last three or four years we have provided options and risk management training for more than 1,000 customers in Europe ex-Germany and for another 2,000 in Germany," he says. "The result is that we have created a cadre of customers who are far more literate in terms of risk management, derivatives and strategic solutions."

The strategy has paid dividends. Herron says that profits at his group now divide up roughly equally between spot, forward and options trading. Five years ago, he says, options would have represented less than 10% of the total.

Jain says that the Deutsche focus is global and multi-product - aimed at servicing clients ranging from "fruit exporters in Düsseldorf right through to highly sophisticated fund managers in Boston". But the focus has inevitably pushed the bank's foreign exchange franchise more towards institutional investors than to corporate clients. So too, inevitably, did Deutsche's acquisition of Bankers Trust and the vast custodial assets that were opened up as a result.

Deutsche's head of foreign exchange sales in New York, Wayne Grigull, who joined from Merrill Lynch in 1997, points out that the Bankers Trust purchase meant that the new Deutsche Bank had custody assets of about US$3.6 trillion and more than 4,000 customers. "This means," he says, "that we are now sitting on one of the world's largest asset pools," adding that a key component of serving those customers has been a strategy of transforming the foreign exchange component of managing a portfolio from a chore into an opportunity.

Inside the institutions

"If you're an equity portfolio manager your foreign exchange conversions have traditionally been seen as a necessary evil," he says. "Our strategy has been to become more deeply embedded in that process and to help to create operating efficiencies for fund managers." The strategy has apparently been warmly appreciated by institutions. "I've had asset managers tell me that they can add up to 100bp to their annual performance just by making fewer mistakes in their foreign exchange transactions and by having faster and more efficient trading and settlement systems," says Grigull. "We feel that we have been in the jetstream of that technological process."

The institutional bias of Deutsche's foreign exchange franchise is strikingly evident in the results of this year's survey. Based on replies from institutional investors only, Deutsche has in the last year more than doubled its market share. It has also increased this share to such a degree that its 15.97% in the institutional category just outstrips the combined shares of Chase (9.99%) and Citi (5.96%). If institutional replies are stripped out, Deutsche holds on to its second place with a market share that has barely changed in comparison with 1999. On the same basis, Citi strengthens its grip on its leadership position, increasing its share from 7.85% to 11.53%.

This, twinned with its overall leadership in the ranking of relationship banks, leads Citi's London-based global foreign exchange manager, Guy Whittaker, to report that at a personal level he is "not even slightly gloomy" about this year's results. "Of course we will look at the results of the survey and look to learn from them," he says. "But we remain very gratified that a large number of the qualitative indicators still show us to be in the leading position which gives us a very good platform from which to rebound next year.

"We have the widest geographical representation, the broadest client base and, I still believe, the most comprehensive sales and trading coverage of any institution in the world," he adds. "We talk to our clients regularly and extensively about the quality of service we provide and the feedback has been very positive."

But why, then, did Citi slip from first to third in this year's survey? Many competitors say that one key reason is that 1999 was an exceptional year. It was a year in which interbank volumes dwindled significantly, especially in the fourth quarter, and one in which an unprecedented volume of foreign exchange trading was derived from institutional flows and M&A activity. In other words, players with a long-standing investment banking pedigree benefited more than those with a more traditional, commercial banking-oriented background.

By extension, 1999 was therefore also a good year for those banks that were able to fuse the investment and commercial banking functions successfully. While Deutsche was an obvious beneficiary, so too was a player such as Warburg Dillon Read, the steady Eddie of recent surveys, which ranked fourth overall in 1999 and 2000. "Clearly banks have been moving more to the middle ground in recent years," says Simon Jagot, WDR's managing director and global co-head of treasury products. "Commercial banks are trying to provide more investment-banking-style products and investment banks are trying to become more respected in areas of the foreign exchange market such as liquidity provision.

We feel we are well positioned to take advantage of the trend because we come from a commercial banking background which means we have big spot and cash teams and a very aggressive derivatives capability.

But we also have a strong investment-banking flavour with outstanding research and a strong equity and fixed-income franchise. So we sit in the middle almost as a hybrid, which is a position many banks are trying to gravitate towards."

At Citi itself, Whittaker agrees that in several respects the foreign exchange goalposts were moved in 1999. "It is clear that equities as an asset class and, especially the technology sector, commanded the lion's share of attention over the last year," he says. "Bond mutual funds have not grown as fast as equity funds, and the role of direct investment is greater than it was a few years ago, when capital flows were dominated by fixed income managers. At the same time growth in nominal world trade has continued to expand, but clearly represents a smaller proportion of overall volume than that which has been generated by institutional money."

Others identify this as a shift that has clearly hurt Citi's foreign exchange operations. "The fact is," says one investment banker, "that when institutional investors look around at who is best in equities underwriting, sales and trading Citibank is not a name that springs to mind. I think its foreign exchange franchise is suffering as a result."

But Salomon Smith Barney is - or should be - a name that springs to mind in both equities and bonds. Over the last year Salomon has been at the forefront in terms of leading primary euro-denominated bond issues for corporate borrowers across Europe, and Citibank's foreign exchange operation ought to have been able to exploit this franchise more effectively.

"From a forex perspective we are totally integrated," Whittaker insists. "We are working very closely with our colleagues in equities, fixed income, investment banking, derivatives and asset management. It has been a very positive experience and will certainly enable us to capture a much larger part of cross-border capital flows than in previous years."

Marriage with derivatives

Integration of these product areas is also clearly the watchword at other banks that in days gone by would have been characterized as purely commercial banking institutions. At Chase Manhattan in New York, managing director and head of the global trading division Don Wilson says that the most important initiative his bank has taken in the last year has been the integration of derivatives sales with foreign exchange sales. "Frankly our customers around the world don't see themselves as buying products from a commercial or an investment bank, and they don't see themselves as buying from a currency or a derivatives house," he explains. "They are buying integrated risk management products."

Robert Standing, managing director and head of global trading for Europe at Chase in London says that the integration of foreign exchange and derivatives sales was driven principally by client demand. "We found that even before we officially put the two operations together we were working more closely with our derivatives colleagues in other product areas and going on joint calls to clients," he says.

The process of integration at Chase is starting to pay dividends. In addition to leapfrogging Citi in terms of global market share, Chase has chalked up some striking local successes in this year's survey - above all by becoming the first foreign bank ever to have been voted the best foreign exchange outfit in Tokyo. That in a year in which trading volumes in dollar-yen have been flat, and in which those in euro-yen have been described recently by the Bank for International Settlements as "a major disappointment".

Wilson worked at Chemical in Tokyo in the mid-1980s and built up the old bank's foreign exchange franchise with Yuko Takahashi, who today is head of Chase's Japanese foreign exchange division. "We take a great deal of satisfaction from our performance in Asia this year," says Wilson, who says that over the last seven years Chase has probably put more resources, management time and commitment into its east Asian operation than into any other. "By the early 1990s," he says, "we had come to the strong belief that we needed to create the same revenue and earnings structure and client penetration that we had achieved in London and New York for two reasons. First, because more and more of our clients are global. Second, because from a shareholders' perspective we are better off with three pistons than with two."

Winning in Japan

"Volumes have not been skyrocketing," says Takahashi in Tokyo. "But we have seen a steady increase because we have expanded our market share in a year when total volumes have remained steady. Going forward our main target will be to strengthen our leadership position in Tokyo by recruiting more talented individuals."

Tom Hoppe, the Singapore-based managing director and head of the global trading division for Chase's Asia operations, says that in other Asian markets the bank has a "slightly more narrowly focused client base". In regional markets, he explains, Chase markets a total risk management service that adds value for larger names with cross-border exposures.

Product integration at Chase, blurring still further the differentiation between commercial and investment-banking players, seems likely to intensify following the bank's acquisition of Flemings, which is another milestone in the Chase crusade towards full-service banking. "When the Chase-Chemical merger was announced five years ago this August we said publicly that we wanted to expand into two key areas," says Wilson. "These were equities and asset management and this is exactly what we have done through our acquisition of Flemings and Hambrecht&Quist (H&Q). Flemings is a great manager of non-US equity funds and the currency implications that will arise for our foreign exchange business are pretty large.

H&Q is a big underwriter of new economy equity securities and a lot of its clients need equity derivatives such as caps and collars and floors."

Bankers are in no doubt that the process of product integration within the foreign exchange market will accelerate as consolidation continues to gather momentum in the global banking sector. "The first major trend in foreign exchange today is that the big are getting bigger," says Herron at Deutsche Bank. "In broad terms the 10 largest houses accounted for 50% of foreign exchange's total revenues in 1997 and for 53% in 1998 and I would not be surprised if they account for 60% in 1999."

Citi's Whittaker agrees that consolidation will continue and that the big will grow still bigger in years to come. "There are about six oil companies and six car manufacturing companies dominating their industries today," he says. "Perhaps six banks would be an appropriate number in ours."

Related to this trend is the search for added value and the gravitation, as a result, of much more highly qualified individuals towards the foreign exchange business, no longer stereotyped as being peopled to a large degree by the financial industry's equivalent of second-hand car dealers. "The people involved in the foreign exchange sector these days are much more highly qualified than they used to be," says a headhunter who has been specializing in forex for more than a decade. "Banks are hiring much more scientific and mathematically trained people. The French business schools and universities are becoming a very good hunting ground for staff working on the currency options side and the other more exotic products which banks need to offer in order to stay competitive."

The convergence of commercial and investment banking under the broader umbrella of foreign exchange is also strikingly apparent in the continued success enjoyed by the bulge bracket Wall Street firms in this year's survey. While there has been little this year to compare with 1997's meteoric surge of Merrill Lynch, when the firm leapt to third spot, Lehman Brothers' ascent from 186 to 18 is among the more eye-catching developments this time around. Lehman's position is unlikely to cause too many sleepless nights among the leading three. But neither is it a statistical freak or an accident. Last September Lehman hired Ivan Ritossa as its managing director of European foreign exchange from Bankers Trust where he had spent the previous 16 years, and he says that industry trends are playing more into the hands of investment banks such as his.

"Clients are restricting their counterparties to five or six banks and are choosing banks that can satisfy their trading, hedging and research needs across all the asset classes," he says.

"In the past, people looked at Lehman Brothers as a fixed-income firm. Today, they see a much more broadly-based investment bank which is a leader in equities, corporate finance and M&A as well as the full spectrum of bond trading. Clients who are dealing with Lehman Brothers in the bond and equity markets are seeing that it makes sense to talk to us on their foreign exchange activities as well."

Leveraging securities skills

At Morgan Stanley Dean Witter, which came 10 this year compared with 15 in 1999, managing director and head of European foreign exchange Roger Tarika is also upbeat about the potential for investment banks in the foreign exchange market.

"Our strategy has certainly been to leverage off our expertise in the bond and equity markets and integrate this with foreign exchange dealing," he says. "The strategy is to take advantage of the capital flows that seem to dominate this business nowadays, be they related to equity, fixed income or M&A. The size and scope of those flows is increasingly dwarfing those of trade-related flows and in the last three years we have made a concerted effort to expand our team globally to capture those flows." Specifically, Tarika says that his team numbers 175 individuals compared with 120 three years ago.

Perhaps the most consistently successful of the Wall Street investment banks, however, has been Goldman Sachs, which rose from 14 in 1996 to eighth in 1997, fourth in 1998, fifth in 1999 and sixth this year, and which appears to owe much of its success to the strength of its M&A franchise. "As a firm our strategy is to be very heavily focused on the corporate world," says John Winkelried, head of European fixed income at Goldman Sachs in London. "If you look at our franchise across Europe there are very few firms that have the same level of penetration as we do in the capacity of merger adviser, equity underwriter and, increasingly, debt underwriter. We also have a very strong position as a loan underwriter in the jumbo M&A-based transactions in Europe.

That has put us in a very leverageable position in terms of clients' overall transaction flow."

Those who are sceptical of the push into foreign exchange by the investment banks say that the temporary emergence of a handful of these firms has been a hallmark of the Euromoney survey for the last five years, and that none has been able to demonstrate much staying power.

"Investment banks have sporadically gone after the smaller segments of the market quite successfully, and this has been most apparent whenever we have seen surges in M&A activity," says an observer at one of the larger banks. "But I don't think they have been prepared to invest the serious sums of money into the whole infrastructure that is required in the foreign exchange business."

But there are pointers that suggest that Goldman Sachs, at least, will retain the capacity to mix it with the leading players. One of these is the firm's performance in emerging markets in this year's survey. In 1999/2000, Goldman has leapt up the tables in currencies as diverse as Mexican pesos, Polish zlotys, Korean won and Turkish liras.

Forex on the web

A more important - albeit loosely related - development over the last year has been Goldman Sachs' wholehearted embrace of technology, which the Wall Street firm believes will increasingly help investment banks compensate for their relative lack of global reach in terms of bricks-and-mortar networks. A recent example of Goldman's commitment in this respect has been its addition to the consortium of Citibank, Deutsche and Warburg Dillon Read which in March announced the launch of Volbroker, an electronic interdealer broking system for the currency options market.

Another is Goldman's commitment to its in-house developed internet trading system, web.ET. This is a multiple product dealing platform available to all its clients, irrespective of where they may be trading, which offers live prices in the spot, forward and options market 24 hours a day, five days a week. Peter Gerhard, Goldman's New York-based global head of foreign exchange, says that, depending on market conditions, web.ET can accommodate trades of any size in a total of 15 currencies, several of which are emerging market currencies. "For large trades typically in excess of $25 million in emerging market currencies and $50 million in the majors, there is still a preference to deal over the phone," he explains.

Goldman Sachs' enthusiasm over the potential for internet trading springs from the conviction that technology is providing investment banks which have smaller global networks with an unprecedented opportunity to mount a challenge to the leading commercial banks.

"The increased price transparency that e-commerce is bringing with it is increasingly levelling the forex playing field," Gerhard believes. "Selling liquidity in euros or yen will involve becoming increasingly commoditized. It will also mean that having a big international network will not necessarily be as valuable going forward as it was three years ago. In order to add value for our clients we will need to continue to provide very strong research, high-value content and block execution capability."

Among the other banks that have performed strongly in this year's ranking of internet dealing services, is Dresdner Kleinwort Benson which jumped from eight to three. This is especially remarkable since Dresdner didn't appear at all among the 30 leaders in terms of overall market share - a result that left. Alex Wilkinson, the bank's global head of exchange-traded derivatives and e-commerce, "stunned" and "very disappointed".

Dresdner's internet trading system, which Wilkinson says now accounts for about 20% of the bank's total foreign exchange trading volumes, is enigmatically named piranha. This has something to do with offering the client the opportunity to exercise more control over his destiny by biting back, and was regarded as being politically more correct than Toti (trading on the internet) which was the system's original acronym but too close to a vulgar piece of British slang.

Wilkinson and his team have spent the last year working hard at developing a system that he describes as being aimed at "empowering" the customer through the provision of straight through processing.

"Everything about the system," he says, "is designed to allow clients to choose the precise moment at which they interact with the capital market."

Critics of the Dresdner system say it is based on dealer intervention. "It's one of those systems where a customer asks for a price and the dealer has an option of accepting or not accepting the trade depending on whether or not the market has moved for or against him," says one competitor.

Expletive deleted

Wilkinson's exact response to this charge is unprintable. He is adamant that the piranha system does offer auto execution, although it seems that the confusion among competitors may have arisen because the service remains limited. At the moment, the system is available only to certain customers in certain currencies who have negotiated limits on individual transactions of up to $5 million (or $10 million in one instance) based on what Wilkinson describes as a "mutual understanding" between the bank and its clients.

Much happier with his position in this year's internet trading ranking is Eric Hoh, head of the trading station at SEB in Stockholm, which rose from third in 1999 to two in 2000. The Nordic region already leads the way in terms of retail internet banking in Europe and it is therefore unsurprising that it should also be the standard-bearer for internet-based foreign exchange trading. More surprising, however, is the speed with which this phenomenon has unfolded in Scandinavia. When Morgan Stanley Dean Witter published its huge European Internet Report in June 1999, it commented that about 10% of SEB's foreign exchange deals were being channelled through the internet. Today, according to Hoh, that share has risen to 42%, which is very high given that 85% of respondents to the Euromoney survey say that they have yet to route any trades via the internet.

Hoh says this figure is likely to rise further, given recent improvements that have either been made or are under way in the SEB internet system. These have expanded the range of products available to include futures and fixed income and added a new platform allowing customers to stay on-line all day instead of the previous 10-minute window which was a security feature.

SEB's recent acquisition of BfG in Germany has opened up a new geographical horizon for the Swedish bank, which Hoh says he is hoping to exploit by marketing the internet service to German clients. "In other markets it's all about credit lines," he says, "and of course we can't yet take on, say, a new Spanish client without having the credit line in place." So elsewhere in Europe, SEB is exploring the possibility of establishing alliances with strategic partners for the further expansion of the bank's internet trading platform.

For all the obvious progress that has been made by a number of houses in developing internet trading systems, sceptics say so far the principal focus of the industry has been on achieving cost efficiencies for the banks themselves, rather than on delivering any sort of value added for the customer. Zar Amrolia, who recently moved from the foreign exchange business to become head of global e-business at Deutsche Bank thinks that "there has been a lot of froth and not too much substance about foreign exchange trading over the internet o far. The systems out there at the moment do not provide what customers really want, which is a co-mingled service providing prices from multiple banks combined with straight through processing." Instead, he suggests that many systems developed to date are often little more than "glorified e-mails".

Amrolia says that he is disappointed but not surprised that, in the second year in which respondents to the Euromoney survey were asked to comment on banks' internet trading facilities, Deutsche has slipped from first to fifth. "During the last 12 months we have been focusing on going round to our customers and asking what they actually want from e-commerce and m-commerce [mobile-commerce]," he says. "By implementing the results of this research we hope to offer a service that the customer genuinely needs and wants. Watch this space."