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Tuesday, 24 October 2017

Fight-back takes root in CIB

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  • keith mullin

You heard it here first: we’re entering a new phase of the banking cycle. And that’s despite the poor set of underlying operating conditions the industry is confronting, exemplified by volatile markets, NIRP and low economic growth, a shrinking wallet in certain business lines and individual bank rehabilitation programmes. 

 

It may be subtle but the nuancing of the story has taken on a distinctly more positive and more assertive air. Ironically it’s the cover of those poor conditions, the ongoing rehab programmes, the strategic recalibration, and a nearing of the end of the wave of post-crisis regulatory fervour that is propelling the cycle forward. 

Current and past re-tuning at the likes of UBS, Morgan Stanley HSBC and UniCredit, or the more urgent strategic re-thinks at Credit Suisse, Barclays, Deutsche Bank, RBS and Standard Chartered have resulted in partial or full withdrawals from geographies and/or businesses. That means opportunities for others, and it’s pushing banks – European banks too albeit a step or two behind their US peers – beyond tactical crisis and survival management into a set of renewed forward-looking growth strategies designed to capitalise on their key strengths. 

Management teams sense there’s market share up for grabs as they factor in growth in their core business lines at the expense of those that are weak or withdrawing. This is no blood-in-the-water frenzy, nor are growth aspirations built on unsustainable short-term tactical gains. Plans are more considered and built around core business lines and their clients. Stringent cost control, RWA monitoring and – ultimately – exceeding cost of capital are major imperatives. 

In a recent commentary entitled: “The Europeans are coming”, I wrote about the more thrusting demeanour being adopted by Commerzbank, Natixis and Credit Agricole in corporate and investment banking. I’m evaluating others and will provide updates shortly. 

One of the many things that struck me around the theme was the tone of optimism in the individual stories being narrated, and it’s not just a European story. In fact, once I’d written my commentary, I noted that RBC Capital Markets is dancing to exactly the same tune: taking advantage of the withdrawal by some European banks from areas of US investment banking to carefully expand its own footprint.

 

The CA-CIB story

I’d tacked Credit Agricole to the end of my earlier comment piece without too much detail because I needed to better understand the group’s Strategic Ambition 2020 story as it pertains to Credit Agricole Corporate & Investment Bank. Having since chatted in detail with a senior CA-CIB executive and conducted my due diligence, the bank’s story fitted my thesis like a glove. To my point about considered growth, the firm has no frantic ambition to move above the approximate number 15 position in the CIB wallet. I kind of like that. 

The bank is comfortable with staying more or less where it is but with a consistent business profile, a broadly stable geo-revenue footprint (30%-plus France; 30%-plus rest of Europe; 20% US; 15% Asia-Pacific; the rest MENA) but with a big focus on improving cost-effectiveness. And being selective about which clients to bank and exiting relationships that undershoot its returns target. The emphasis in the US and Asia in particular is on cross-selling to large customers to increase profitability per client.

Oddly enough, following my conversations I was less taken by the fact that CA-CIB sees growth in targeted areas than I was with how carefully management had thought about where growth was likely to emerge - what it needed to do to capture the upside - and where conversely it didn’t want to grow to avoid consuming more risk-weighted assets or taking on more risk. This kind of thinking across the industry is relatively new. 

Because Credit Agricole was forced into a heavy restructuring in 2011-12, it has the benefit of having a few years’ head start on others still trying to figure it out. The debt-focused CIB strategy today is predicated on maintaining a low risk profile, expanding its global markets business within set parameters and maintaining its financing business more or less as is. 

The global markets business covers DCM (where CA-CIB ended 2015 within a whisker of a top five position in euro bond underwriting), rates, FX (where it’s slowly climbing up the rankings), securitisation (4th in 2015 in euro-denominated global structured finance) and structured products (which are catching more investor interest after a 2-3 year hiatus given the current yield environment). The executive I spoke to said the bank’s overall position had improved relative to two years ago and the 2016 growth target had been set at 3.8%. 

To the cautious growth point, CA-CIB’s target for its financing business is just 1%. Why? Because the bank is already top 10 world-wide in structured finance (infrastructure, energy, trade and export finance; transportation finance etc). And while, with regard to the latter area, management sees growth in areas like rail, it may look to shrink its significant shipping footprint. 

The senior chap I chatted to told me: “We will reinforce our position in financing but we don’t want to grow because that means taking more risk than we do today and our risk appetite is very low. Growing will also mean increasing our balance sheet and that’s something we definitely don’t want to do.” 

On the client selectivity point, my interlocutor said: “Some years ago, the classic relationship with a corporate was extending balance sheet loans, getting a bond issue every two to three years and thinking life was beautiful. That’s no longer how it works. Because of the very low level of loan margins and the regulatory framework, we need to have complete relationships with large customers across multiple products and business e.g. bond underwriting, FX and rate hedging, securitisation etc.” 

On RWA growth, CA-CIB is offsetting the additional charges stemming from recalibrated regulatory calculations through optimised ALM, optimisation of the markets portfolio and the more selective approach to large corporate exposures. Regulators landed CA-CIB and asset-servicer CACEIS with an additional €12bn on top of the combined €132bn of RWAs they already consumed but most of that has been neutralised. 

At the business end, CA-CIB and CACEIS will be increasingly integrated. Given that the two share significant client overlap (particularly with asset managers and insurers), a new commercial organisation will see client coverage converge and operations merged, creating a globally more efficient business. CACEIS – which claims to be number 3 in its space in Europe and number 10 globally – will watch carefully and will look to capitalise on any consolidation opportunities that emerge in the area of custody.

 

RBCCM flexing too

A quick word on RBC Capital Markets. A recent Reuters news story quoting Blair Fleming, head of RBC Capital Markets in the US, and Vito Sperduto, head of US M&A, made it very clear that the Canadian shop is looking to fill the gap left by retreating European firms to increase US client penetration, both at the large end and in the mid-market in M&A, leveraged finance and other areas. 

It’s looking to increase its share of IB fees from 3% to 3.5% to 4%. Not revolutionary but given the size of the US fee pool (US$40bn), it’s pretty significant from a revenue perspective. 

I was struck by how similar Fleming’s quoted comments were to the comments I got from some of the senior executives at the European CIBs I spoke to. Just as CA-CIB doesn’t want to buy its way into higher CIB echelons at the risk of becoming less profitable and less efficient, RBCCM is not eyeing a top 5 position, according to Fleming. 

“Breaking into the top 5 would require a lot of capital and taking significant risk - this isn’t something we aspire to,” he was quoted as saying. “Overall, (number) 7 to 10 is a reasonable spot for us to occupy,” he said. Improving ROE in its US business is a key priority. 

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