Deutsche Bank’s European head of FIG, Charles Murphy, explains to Geraldine Lambe why the bank decided to beef up its financial institutions capability and what the main challenges have been.
Deutsche Bank has proved pretty good at playing catch-up. From its roots as a strong, regional commercial and consumer bank, it created a global investment banking platform and an enviable fixed income franchise within a few years.
Likewise, it had no coverage to speak of in the financial institutions group (FIG) area until the end of the 1990s. That all changed in 1999, when Deutsche hired management consultancy McKinsey to find out if this was a gap in its business plan that the bank should try to fill. The results were conclusive: FIG business constituted about a quarter of the available investment banking wallet – the sort of revenue and fee pool that could not be ignored.
“Financial institutions access the capital markets continuously for both funding and investment purposes,” says Charles Murphy, European head of FIG Global Banking at Deutsche. “In contrast to corporates, for which capital markets activity may be intermittent or opportunistic, the capital markets are core to financial institutions’ business. As such, they seek strategic relationships with their core investment banking advisers, and coverage needs to be comprehensive, co-ordinated and advisory led.”
The bank has made a substantial effort to build its FIG platform, says Mr Murphy. “While we had some pockets of strength in financial institution coverage in Germany, insurance, and equity and debt capital markets, Deutsche Bank decided in 2001 to build a global FI coverage team within investment banking to leverage its strong markets businesses and product capabilities.
“European FI coverage is now of a similar scale and size as our competitors – more than 40 dedicated people [out of a global FIG investment banking team of 80], with specialists in the various disciplines, such as M&A, and equity and debt capital markets.”
Relationship building
The main challenge has been to build relationships with clients. Despite the need for product and geography expertise, FIG is still very much a relationship-driven business and one in which the touch points stretch right across the client’s business. “From when we first institute client coverage, it takes time to move the client relationship from prospect, to trial, to transaction to trust. It is a long-term process. We have generated momentum and will continue to build on that,” says Mr Murphy.
He believes that the bank has “made good progress and seen good growth”, citing the growth of FIG as a percentage of overall revenues. While Deutsche is unwilling to reveal specific revenue figures or percentage growth, Mr Murphy says FIG now constitutes about 50% of its Corporate and Investment Banking group revenues.
The bank has also climbed up the league tables. According to analyst house Dealogic’s fee-based league data for FIG business, Deutsche moved from sixth position in 2001 to second in 2002 and first in 2003. It slipped back down to fifth in 2004, but Mr Murphy says that in percentage of market share, there was only about 0.4% separating Deutsche from UBS at the top of the table. “Changing positions were driven by small numbers of very large deals,” he adds.
IPOs and other deals
Landmark deals for the bank include equity issues for Allianz and Munich Re in 2003 and Postbank’s initial public offering (IPO) in June 2004. In mergers and acquisitions (M&A), the bank was adviser in the hotly contested Banco Atlantico sale for $1.8bn in February 2004 and sold the National Bank of New Zealand for Lloyds TSB for £2.25bn in December 2003. In April 2003, Deutsche led the largest ever single issue of insurance hybrid capital, for Munich Re, and has led several innovative transactions for ANZ, in the US ($1.1bn in November 2003), euro (€500m in November 2004) and Australian domestic markets (A$1bn in September 2003).
Mr Murphy says that in the next couple of years FIG M&A business will be driven by banks’ search for growth opportunities and their continued move to focus on core business.
“Many domestic banking markets are relatively mature and consolidated with only moderate top line growth prospects. The sector as a whole is generating excess capital and the larger banks have increasingly been looking to invest this through acquisitions in growing geographic markets and product lines. Across Europe, Middle East and Africa markets, there are nearly 200 banks and insurers with a market cap, or value, of more than €1bn, so there remains enormous scope for consolidation. It is a question of when and in what form, rather than whether, this will take place,” he says.
While M&A is a significant business in itself and an important issue for CEOs and CFOs in the next three to five years, he says that the sort of relationships that banks need to cultivate for M&A discussions are also a strategic element of Deutsche Bank’s capital markets dialogue with clients.
“Balance sheets that needed repair have largely been addressed, so future equity capital raising is more likely to be to fund growth, particularly for acquisitions – as we have seen for Royal Bank of Scotland and Standard Chartered to fund acquisitions in the US and Korea – and that part of the capital markets business will therefore be advisory-led.
“Investment banks must integrate advice and execution across a range of areas, as Deutsche did in the hybrid debt and equity package that it arranged for Kaupthing Bank in support of its 2004 acquisition of FIH,” says Mr Murphy.
In debt capital markets (DCM), there is a healthy pipeline, and one that plays to Deutsche’s fixed income strengths. After a spectacular 2003, many DCM managers wondered whether such a stellar performance could be repeated, but 2004 turned out to be one of the strongest years ever for FIG DCM. This year also looks good. Recently, funding has been driven by evolving regulatory standards and the chance to arbitrage those.
“New regulatory requirements have led to a demand for greater and different types of capital, particularly in the insurance sector – a lot of existing capital issues are maturing or may be called or bought back and replaced with new instruments that better meet evolving regulatory standards. There have been a lot of opportunities to optimise capital structures, for example, to meet the requirements of the Insurance Groups Directive. Also, firms have been looking carefully at ‘where’, within a financial conglomerate, they finance to meet evolving capital requirements,” says Mr Murphy.
Investors have also had a big impact on the type of products and credits that have been successful, he adds. The search for yield has led investors to accept more duration, credit and forex risk, and more exotic instruments and issuers. This has driven the boom in structured products and in product innovation in general.
In 2004, constant maturity swaps (CMS) proved a popular and successful product, providing cheap funding for issuers and solid flow business for banks. There has already been about E6bn of issuance this year. Deutsche Bank introduced a new variant on the theme, the CMS Steepener format, with an issue for AXA in December 2004.
Mr Murphy believes that the CMS Steepener (a yield curve play in which the first five years are fixed at 6% and then the paper converts to a floating rate, earning about 4.5 times the difference between the 10-year and the two-year notes) has since become the dominant format for retail hybrid issuance. In January, Deutsche Bank led transactions for AXA, Natexis, Alpha Bank, National Bank of Greece, Kaupthing Bank and Deutsche Bank itself. Mr Murphy says that such structured hybrid products will continue to do well during 2005.
ALM focus
And the emphasis on asset liability management (ALM) is set to continue, says Mr Murphy. “ALM is a major issue for our clients. A lot of it is flow driven, by individual portfolio managers. The large treasury operations of banks and insurers use structured products to get access to a diversified group of credits, for example – and to match against expected liabilities.
“An increasing proportion is strategic as well – with decisions made by CIOs, CFOs and even CEOs – around the financing of product guarantees and pension liabilities, for example, including in the context of examining potential acquisitions and, as such, must be a strategic focus in client dialogue.”
Although Mr Murphy says that Deutsche Bank has accomplished more in the FIG franchise than many competitors believed it would, he acknowledges that it could achieve much more. “Our competitors have been building their European FIG platforms since the late 1980s, so there is still plenty of work to do,” he says.
Career history:
2001: joined Deutsche Bank as European head of FIG Global Banking
2000: co-founder and CFO of Antfactory, an internet incubator
1990: joined Morgan Stanley in New York, moving to London in 1993 as co-head of FIG Europe
1985: joined Goldman Sachs, New York, as associate
1985: JD, Harvard Law School
1984: MBA, Sloan School of Management, MIT
1981: BA in economics, Columbia College
