The British investment bank is back
UK-headquartered houses are set to take an increasing share of the global investment banking market
It is one of the ironies of the past decade that while the City of London has prospered from the global financial services boom it has not been home to the global headquarters of a single top-tier investment bank.
As with the Wimbledon tennis championships, which start this week, the City has long been happy to host the tournament even if all the top players are from overseas. While the senior management ranks of US and European investment banks are bulging with British talent, they have struggled to find top-tier British banks at which to work.
But that could soon change. Just when Britain has a realistic chance of one of its players – Andy Murray – winning Wimbledon for the first time in more than 70 years, it is also seeing a renaissance in the fortunes of its home-grown investment banks.
Barclays Capital, HSBC and Standard Chartered are all in the build-out phase of programmes that aim to establish them in the top tier of the global investment banking industry. And that could make London the home once again to a clutch of top players in the world’s markets. Even Royal Bank of Scotland, the majority state-owned bank humbled by the credit crisis, is fighting back in investment banking, as we report this week.
The past 10 years have seen a rapid, but faltering, expansion of Britain’s investment banks. In 1999 the UK’s four leading wholesale banking businesses, BarCap, HSBC, Standard Chartered and RBS, had a combined share of the global investment banking fee pool of 4.4%, while in Europe the figure was 4%, according to Dealogic.
Fast-forward to the end of last year and globally this figures had risen to 8.3% and in Europe to 9.8%. Year-to-date market share is running at a record 9.1% globally and 11.9% for Europe.
In markets such as equity underwriting, the four banks accounted for less than 2% of the market two year ago, but by the end of last year this had more than quadrupled to 8.6%, while so far this year they enjoy a market share of 12%.
In debt capital markets, UK banks have made their biggest impact and three out of the five leading underwriters of European bond issues this year are British, with Barclays Capital and HSBC ranking first and second, followed by RBS in fourth place.
One London-based head of capital markets at a big European bank said: “I think the British banks have a great opportunity at the moment, they’ve done very well over the last couple of years and they’re looking like major competitors.”
Barclays Capital has become the most obvious example of this following its acquisition last year of Lehman Brothers’ North American operations, which has led to a nine-fold increase in the bank’s US investment banking fee income and a doubling in revenues from its top 500 clients over the past 12 months.
Speaking to analysts in New York last week, Barclays Capital’s president Bob Diamond finished a presentation to investors with the modest mission statement for the business to become “the premier global investment bank”.
This came a month after Morgan Stanley analysts included Barclays in what they see as an emerging global super league of investment banks, or as they described them “flow monsters”.
HSBC, by contrast, has taken a markedly lower-profile approach to the expansion of its global banking and markets business. This has been driven in part by the bank’s earlier experiment in building a London-based investment banking business between 2003 and 2006, when it spent more than $800m on a disastrous and ultimately unsuccessful attempt to create a top global advisory operation.
Over the past three years, HSBC has pursued a quieter strategy focused on emerging markets and its financing business, which has proved more sustainable and successful.
Last year, despite the financial crisis, HSBC made record revenues in its foreign exchange, rates and securities services businesses, a trend continued into this year, when the division as a whole reported record quarterly revenues for the first three months of the year.
Samir Assaf, head of global markets at HSBC, said: “People have learnt the lessons of the financial crisis and are looking more closely at who they are dealing with. If you want to put in place some kind of 30-year swap arrangement, you want to know your provider is going to stick around, because these types of position are expensive to change.”
HSBC’s financial muscle has led to an acceleration of its plans for the division and Assaf said the bank’s clients are urging it to make an even bigger push to expand the business.
However, Barclays and HSBC should not expect to have things all their own way.
Paul Delaney, treasurer of UK advertising company WPP, said that although HSBC and Barclays are among its core relationship banks, their nationality or any view that they weathered the financial storm better than their peers did not mean they would automatically receive the “first call” when the firm needs to put some financing in place. He said: “We speak to all our banks as equals.”
Ambitious plans
Standard Chartered is by far the smallest of the UK banks in the investment banking business; it ranked globally 40th last year by total fee income, according to data provider Dealogic. Mike Rees, chief executive of the wholesale banking division, said his business was very different from that of the other banks, describing it as more of a “utility”.
He said: “Our business is about the depth of our relationships with our clients and not the product silos that operate inside investment banks. Our aim is to provide services that are absolutely vital to the functioning of our clients’ businesses and our approach is about being a local bank, not parachuting in senior people for a particular piece of business.”
A series of high-profile hires in the past nine months have shown the seriousness of Standard Chartered’s intent to build its high-end capabilities.
In the latter months of 2008 Standard Chartered made several senior appointments for the division, hiring Lehman Brothers’ former global head of credit sales, Christian Wait, as global head of capital markets and former Bear Stearns European equities co-head Vincent Van Pelt as global head of equity derivatives and commodities.
The hiring has continued into this year, with senior hires from RBS, Morgan Stanley and UBS, including most recently the appointment of Morgan Stanley’s top Dubai-based banker, David Law, as head of Standard Chartered’s origination and client coverage business in the Middle East and North Africa.
More surprising than Standard Chartered’s expansion has been RBS’ renewed drive behind its global banking and markets division. This was at the heart of massive losses last year that brought the bank to the brink of collapse and forced it to seek tens of billions of pounds in government support.
In the past couple of months, RBS has begun ramping up its investment banking business and, according to bankers at rival firms, the bank is competing actively for financing mandates across Europe. One banker said: “From our conversation with RBS, we understand that they’ve essentially won the argument with the Government and persuaded them that the only hope to make a return for the taxpayer is through the profits from global banking and markets.”
RBS declined to comment.
Recent hires, such as top Bank of America Merrill Lynch credit derivatives banker Antonio Polverino, who is understood to have received a multi-year guaranteed compensation package, show the freedom granted to RBS managers by the authorities to return the bank to profitability.
The UK advantage
Being a London-headquartered business has some advantages over New York-based rivals. The most obvious of these is that of the time zone. Historically US firms have found it more difficult to run the outer reaches of their empires from New York and this explains in part why the London operations of many investment banks became their effective international hubs.
Goldman Sachs, Lehman Brothers and Merrill Lynch, among others, effectively run their non-US operations out of the UK.
This also points to the geographic advantage of being based in London, which is closer to many of the world’s growth markets, where an increasing share of investment banking revenues will come from over the next years.
Nick Studer, global head of the financial services practice of consultants Oliver Wyman, said: “Over the longer term, the clear trend is for the investment banking wallet to move eastwards as the world’s economic centre moves towards Asia, so being closer to these markets will become more important.”
Barclays, HSBC and Standard Chartered are all well known in the Asian markets and have long historical ties to the region where they are arguably better known than in much of Europe.
Rees at Standard Chartered said: “Many senior politicians and regulators in Asia and Africa have an affinity to the UK, which is seen as being a neutral player, and this helps business.”
• Bulldog spirit – four in focus
Barclays Capital
2008 investment banking fees*: Global $2.36bn (€1.7bn) – ranked 9th; Europe $607m – ranked 11th
Staff: 20,000 Key hires: Sam Dean – co-head of global equity underwriting (former co-head of global ECM at Deutsche Bank); Jim Renwick – head of corporate broking (former chairman of corporate broking at UBS)
Barclays Capital is easily the closest thing the UK has to a global investment banking powerhouse and with its purchase of Lehman Brothers’ North American operations last year was catapulted to the top tier of the industry.
A presentation by Barclays president Bob Diamond last week emphasised the bank’s aim to become not just a member of the global investment banking elite, but the world’s premier investment bank.
Globally, BarCap is ranked outside the top five for investment banking fees earned so far this year. However, the bank’s continued aggressive build-out of its business, particularly the rapid expansion of its European operations to match what it now has in the US, mean this is unlikely to remain so for long. Hires have included scores of senior managers from rivals, including, in May, top Goldman Sachs technology, media and telecommunications stocks trader Howard Spooner.
Some rivals say BarCap might have come too far, too quickly, but the bank is insistent its record shows the type of tight cost discipline that will keep the business on track.
HSBC
2008 investment banking fees: Global $2.16bn – ranked 14th; Europe $575m – ranked 12th
Staff: 12,000 (industry estimate) Key hires: Andrew Crane – head of European equity flow trading (former head of European equity at Citigroup); Simon Hotchin – head of Insurance Solutions Group (former head of Benelux insurance coverage and asset liability management team at Morgan Stanley).
After a disastrous and expensive foray into the world of investment banking in the first half of the decade, HSBC has pursued a more modest strategy focused on emerging markets and the financing business.
This plan has proved far more profitable for HSBC, which in the first quarter reported record revenues from its global banking and markets division, having navigated 2008 relatively successfully compared with most of its peers.
HSBC is accelerating the expansion of its wholesale banking operation, with rising client demand for its services on the back of its financial strength. Equities is one area where the bank wants to expand, but it is also making selective senior hires for its fixed-income business, as well as setting up a foreign exchange prime services team.
RBS
2008 investment banking fees: Global $1.48bn – ranked 10th; Europe $931m – ranked 5th
Staff: 17,000 Key hires: Antonio Polverino – head of European distribution (former top derivatives banker at Merrill Lynch); Marco Mazzucchelli – deputy chief executive of global banking and markets (former head of European investment banking at Credit Suisse).
When RBS fell into partial state ownership late last year it scarcely seemed credible that the investment banking division, which was largely responsible for the more than £20bn (€23.5bn) of losses made by the bank, would be active in the markets less than nine months later.
However, RBS’ new management appears to have persuaded the Government that if the taxpayer is to see a return on its investment then the global banking and markets business must be allowed to continue to be a market participant.
One rival banker said he had seen RBS bid aggressively for trades in several European markets, including France and Spain, and new hires such as Antonio Polverino and Marco Mazzucchelli indicate a business that will not be afraid to take risks.
RBS has announced hires for its equities business, with Frank Ertinger joining as head of sales for Germany from Goldman Sachs, while Vito Lo Picollo, head of Italian equity capital markets at Citigroup, joined this month as head of ECM for Italy, Greece and Turkey.
Standard Chartered
2008 investment banking fees: Global $163m – ranked 40th; Europe $20m – ranked 98th
Staff: 13,500 Key hires: David Law – head of origination and client coverage for the Middle East and North Africa (former head of investment banking Mena at Morgan Stanley); Christian Wait – global head of capital markets (former global head of credit sales at Lehman Brothers).
Standard Chartered wholesale banking division is the least conventional of the four businesses and in many ways is the closest example of an old fashioned British merchant banking business. All contact between the bank and its clients is held by individual relationship managers who offer the full range of its services to clients.
Having stumbled in traditional investment banking provision in previous decades, Standard Chartered’s business has been concentrated on providing utility-type services that companies require, from cash management to trade finance. However, it has begun to expand the scope of its operations into high-end services.
The past nine months have seen several senior bankers join from bulge-bracket firms, with former Bear Stearns and Lehman Brothers staff joining the bank last year, including Bear Stearns’ former co-head of European equities Vincent Van Pelt.
This year, the bank has continued this trend, with the appointment in April of UBS’ co-head of European flow credit trading, Henrik Raber, as head of European and US capital markets and most recently the hire of Morgan Stanley’s top Dubai-based coverage banker David Law.
*Figures are according to Dealogic estimates
• When Britannia ruled the waves
by Grant Clelland
In his book, The Death of Gentlemanly Capitalism, author Philip Augar paints a picture of the City of London (it was just the City of London then, there was no Canary Wharf) before Big Bang that feels very different to the world we live in now.
Merchant banks advised on and financed the deals for their clients. They were completely separate from the brokers, which helped buyers come together with sellers, and the jobbers, which acted as marketmakers on the Stock Exchange.
Each was steeped in its own traditions. But what they all had in common – apart from a legendary reverence for the liquid lunch – was that they were almost all British.
The big event of 1986, the year of Big Bang, was the privatisation of British Gas. NM Rothschild advised the Government, Kleinwort Benson advised British Gas. The stockbrokers were Cazenove, Wood Mackenzie, James Capel and Hoare Govett. Goldman Sachs, it is true, got a look in – but only as US financial adviser.
The dominance of the British institutions owed as much to the sense of shared history with their clients as their abilities as bankers. Rothschild helped the British fight the Napoleonic Wars, (Barings, coincidentally helped the other side, by financing the Louisiana Purchase, which enabled the French emperor to raise much-needed cash to fight on).
Kleinwort Benson’s predecessors helped finance the UK’s great railway expansion of the 19th century. SG Warburg, a merchant bank which later became part of UBS, conducted the first hostile takeover in the UK, and the first eurobond issue.
The Big Bang reforms prompted many of the UK’s most respected institutions to diversify rapidly into new areas, particularly with an eye to taking on their American rivals, whose business models were based on a far wider range of business lines. But through a combination of poor management, bad decisions, and the sheer scale of the competition, which was better attuned to the more dynamic economy of the 1980s, almost all were to disappear into the arms of foreign firms.
The firms that have survived and are thriving have done so for very different reasons. Barclays was one that rushed headlong into the post-Big Bang world, by buying broker De Zoete & Bevan and jobber Wedd Durlacher to form BZW. Unable to make a full-scale investment bank work, it sold most of the business to Credit Suisse First Boston, retaining only the debt business that was the foundation for its success in recent years.
HSBC and Standard Chartered have focused much of their effort on the emerging markets, although the former’s takeover of Midland Bank was arguably one of the few transactions of the Big Bag years that can be called an unqualified success.
The difference between now and then is that, in the pre-Big Bang world, British institutions could shelter behind traditions, history and rules that meant the financial markets were one of the UK’s most protected sectors. Their modern counterparts have to take on the competition at their own game, and are operating in a much more open, competitive, and aggressive world.
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