DEUTSCHE BANK CARRIES off three of Euromoney's global awards for excellence this year: the world's best credit bond house, the world's best asset-backed house and the world's best risk management house. This confirms its leadership of a small bulge bracket of global banks equipped to deal with the balance sheet and risk management problems of issuers and investors worldwide.
For his contribution to building this business and then leading it forward after the untimely death of its chief architect and his own mentor, Edson Mitchell, Euromoney has chosen Anshu Jain to receive the PricewaterhouseCoopers award for capital markets achievement in 2003.
Jain, who turns 40 this year, thinks back to the spring of 1995 when he followed Mitchell out of Merrill Lynch to join Deutsche Bank. "People said we were mad - and not just for leaving Merrill which was the market leader - but because fixed income was a mature business." But Jain has never believed that. "We've approached fixed income with entrepreneurial zeal. We've never benchmarked ourselves against other firms or copied other people's models. We have instead become the model for others to emulate: very client-focused, with a very problem-solving consulting approach at the heart of everything we do."
The strategy for Deutsche's Global Markets business, which Jain heads, has been to diversify across cash and derivatives, across customer types - issuers, hedge funds and more conventional investors - and across geographies. In the past year it has made a big effort in the US, where foreign banks have often tried to establish themselves but rarely succeeded.
The benefits of building such a balanced business are not always understood. Jain takes issue with the valuations that bank equity analysts have put on fixed-income businesses in the past. He feels aggrieved that they have been more generous in valuing retail banking and especially more volatile asset management businesses, without appreciating the earning power and stability of fixed income and its capacity to generate annuity-like returns. That's now slowly changing. He suggests that global markets at Deutsche Bank is a low-risk, high-return business built on a very large scale.Balancing cash and derivatives
By background, Jain is a derivatives person. He graduated in economics at Sri Ram College and Delhi University in India, took an MBA at the University of Massachusetts, Amherst, and then in 1985 joined Kidder Peabody, where he worked in derivatives research. In 1988 he moved to Merrill Lynch where he spent seven years running a multi-product hedge fund coverage group. Jain says: "I've always had a relative-value approach. My instinct would be to ask, if I saw a client expressing a position in bonds: 'why not use swaps or futures?'"
As a young director and then a junior managing director he caught Mitchell's eye without ever reporting directly to him. Jain was one of the first people Mitchell hired after he moved to Deutsche.
When the ex-Merrill men arrived at Deutsche eight years ago, they found a business that was more German than pan-European, being built around German Bunds and trading of dollar/Deutschmark. Its revenues were modest. "But it was an AAA institution with a long-term commitment to getting the business right," Jain says. "The first couple of years were tough - what with the Asian crisis in 1997 coming amidst the guaranteed contracts we had to offer. But the top management of the bank showed strong foresight and stamina. Joe Ackermann, in particular, showed real long-term commitment to the business, despite the fact that he had only just arrived at the bank from Credit Suisse and it might have been easier for him to walk away."
In his early days at Deutsche Jain ran the global relative-value group and drove the sales effort - distribution power among investors being the foundation on which Deutsche's global markets business was to be built. He says that later "the line businesses I ran were derivatives. But I have never allowed derivatives to strangle the cash business. I simply do not understand those who set little store by market share in the cash business. That's crucial." He explains: "It's about trust. With cash, repo, rates, plain-vanilla new issues, you touch clients multiple times every single day - irrespective of whether there's a CDO blow-up or a derivatives scandal. We have always striven for leadership in cash markets and we have product specialists whose job it is to maintain our market share." It's a business strategy designed to optimize financial returns, not maximize them. Jain says: "That's what has given Deutsche Bank an edge in this business."
Jain has also recruited large numbers of structurers - he employs 170 of them - to research new ways and new products to release value from capital structures and portfolios. He likens it to the research and development effort of a large pharmaceuticals company. "We have four people looking at balance sheet solutions in Europe. We have one specialist who looks at debt versus equity in subordinated companies. He's the best there is. He does that all year. And even if at the end of the year no deal comes out of that work, we'll still pay him a bonus."
But often it does produce deals. Jain mentions the recent securitization of parts of the bank's private-equity portfolio as an example of a groundbreaking new use for long-established cashflow tranching techniques. A lot of the deals the structurers complete weave across asset classes. He mentions another example. "Airlines were rushing to lock in energy prices in the run-up to the Iraq war but many banks would not touch them as counterparties," he says. "Providing a jet fuel hedge requires a bank that understands both commodity derivatives and credit derivatives."Transforming the bank
He is convinced that looking across asset classes and mastering new products can transform how the whole bank works. A recent example, which he declines to discuss, is the bank's much publicized decision to withdraw from a syndicated credit for Volkswagen. Clearly the bank is now going through a disciplined assessment of the costs of capital deployed in lending to certain counterparties and the overall returns from doing a variety of other business for them. Where the economics don't work, tough decisions are going to be made.
Deutsche will reduce risk-weighted assets and has set up a new exposure management group. One of its findings is that banks in Europe paid out a $5 billion subsidy in loans to companies last year and took back $3.2 billion in investment banking fees. Something has to give. But that doesn't mean, Jain says, that it won't lend. "The ability to hedge means that you can sometimes take large, illiquid debt positions to assist clients who may want to tap the capital markets but find that, for whatever reason, they cannot. We've gone to our key clients and told them that we will lend more than ever before. But that requires an ability to hedge."