Since ABN AMRO announced structural changes, it has posted good figures and is climbing the league tables. The bank’s global head of Financial Markets tells Geraldine Lambe that the two developments are closely related.

Like many investment banks, ABN AMRO has undergone some reorganisation over the last couple of years. In the new industry jargon, the aim is to move the bank towards a solutions-based approach from previous product-led strategies. In plain English that means customer-led rather than product sales-led operations. Whichever way you describe it, it is a shake-up of the old business silo fiefdoms.

ABN’s programme is perhaps more ambitious than that of some of its competitors. In addition to the creation of the Financial Markets (FM) division in January 2003 through the integration of global financial markets and loan products (bringing together credit and structured credit markets, rates markets, FX, portfolio management and distribution in one “holistic” package), it established the Financial Markets Advisory group (FMA) to bring together a global, integrated advisory platform.

It can be difficult to assess whether such changes constitute more than a slick veneer. It is even more tricky to determine the concrete value of new corporate structures: does rearranging the business translate to improved client satisfaction and better profitability?

ABN AMRO posted upbeat figures in February, with net profit up by 31% and operating results above €6bn for the first time. The Wholesale Clients (WCS) business unit, which includes FM, also made a far more meaningful contribution to group profits in 2003 – adjusted for currency movements, revenues increased by 9% (even if this did not lead to higher profits because of the increase in bonuses and the extra resources that had to be funnelled into FM to fuel the growth). At the same time, operating expenses dropped by 3.5%.

Of WCS’ €5293m revenues, FM contributed about 50%. In 2002, ABN says its contribution was about the same but, because provisioning has been cut, profitability has increased – although the bank declines to say by how much. Piero Overmars is quick to point out that it is only to be expected. “It’s a big chunk, no matter how you look at it,” he says, “but it’s not really surprising. FM’s focus is on financing and risk management, and creating debt securities for investors. So, its ability to make such a large contribution is built on our core business model matching our clients’ core challenges.”

Decision justified

Mr Overmars is convinced that FM’s first year of existence has justified its creation, and that the FMA overlay was the right move. Between 2002 and 2003 end-of-year rankings, ABN made impressive progress. According to Thomson Financial, it rose to first in global securitisations in euros, moved from sixth to third in bonds in euros and the same in sovereign bonds in euros; in all covered bonds it jumped from 10th to third, and in investment grade bonds in euros it pushed from ninth to fifth.

But have the league positions been bought at a price? Definitely not, says Mr Overmars. “We don’t do loss-leaders. You can do stupid things to gain market share, but it is not good business. Products have to be profitable in their own right. The worst you can say is that on the FX side [where ABN has also been climbing customer polls], we have increased our volumes and market share in an absolute sense, but have not yet grown our revenues. However, in FX, the volumes have to come first and they will be followed by profitability.”

Analysts, though generally positive about ABN’s 2003 numbers, highlighted the group’s disappointing North American results – largely due to the decline in the US mortgage markets – and said that the heat is on if WCS is to take up the slack.

Confident of growth

Mr Overmars is confident that FM can grow. He believes that globally it can increase revenues in credit markets by about 25%. Areas such as structured products have grown in some regions by up to 50% in revenue terms 2002-2003. “This is growing much faster than the flow business, particularly in our European and Asian businesses,” he says.

As with other European banks, the US is a key target. Mr Overmars says that ABN has already built the solid foundations that should make any further investment pay off. Last year, the bank worked on 210 high grade corporate deals in the US but was lead manager on only 37 (although that is up from 151:16 in 2002). Increasing its share of lead roles is where he is sure the bank can immediately see a benefit to the bottom line.

“Clients know we are a debt house that can add value on these sorts of transactions, but our overall capabilities in the US were not enough to secure more lead roles. Clients can see that we have now extended our capabilities in sales and distribution, so, because we have already built trust and goodwill with US clients, it will be easier to gain more lead manager roles. The key is in changing our role within a deal rather than increasing the number of deals overall,” says Mr Overmars.

This pragmatic approach is evident elsewhere in the bank’s US push. In September last year it announced further expansion of its US platform – but there was a clear focus on specific areas: high grade credit and asset-backed securities (ABS). Of the 40 hires last year (bringing FM US to about 500 staff), Peter O’Malley joined from CSFB as managing director and head of debt capital markets, while Caroline Morrill joined from Morgan Stanley as managing director and head of ABS syndicate.

“From a wholesale perspective, we have become more modest in the US. That’s why the bank made the decision to sell its prime brokerage and professional brokerage units. Our focus is on what we are good at and where we can make money,” says Mr Overmars. “Growing investment grade corporate and ABS strengthens our position in dollar issuance. At the same time, it develops our industry coverage and builds term asset securitisation activity on top of our US conduit business.”

New realism

However, this new “realism” will not limit ABN’s future ambitions, he says. For example, the bank is also boosting its US derivatives capabilities and loan syndication leveraged finance business. “Compared to our competitors on the street [the latter] is not a large business, but from a profit point of view, it contributes very nicely,” says Mr Overmars. The FMA team, too, is getting extra resources – last year, for example, Marc Zenner joined from Citigroup as managing director and head of FMA in North America.

“We have to play to our strengths and then build from there,” says Mr Overmars. Capitalising on synergies will clearly play a major role. As such, ABN’s conduit business (with $40bn of outstanding commercial paper), in which it warehouses assets to securitise them when the market is ripe and which Mr Overmars says is the second largest in the US dollar market after Citigroup’s conduit business, is a solid foundation on which to continue developing its ABS platform.

Similarly, ABN sees two or three other areas in which it can improve the relationship between different business lines. For example, ABN-owned La Salle is a major player in commercial real estate, and ABN aims to grow its market share in commercial mortgage-backed securities by working more closely with its Mid-west subsidiary. Finding commonalities between the institutional and retail business – such as structuring products for the private client business – is another target. “We have 15 million retail clients globally, but up to now we have not done enough to tailor products specifically to suit their needs.”

Paying dividends

Overall, Mr Overmars says the bank’s structural reforms have been instrumental in persuading clients of the strength of ABN’s model: local knowledge married to global reach. Equally, he says FM/FMA, combined with more disciplined and aggressive management of its balance sheet, is paying dividends. When FM was established, the bank also laid out its plans to cut its wholesale loan portfolio by around one-third (from €105bn to €66bn in risk-weighted assets between 2002 and 2003) and to focus its balance sheet activities on a more select group of clients. “Revenues have not gone down, so return on capital is better. There is much more focus on economic profit, not the size of the balance sheet,” he says. The bank says that there has been a 20% increase in risk adjusted return on new business.

As important, Mr Overmars argues that this has not been achieved at the expense of customer relationships. In fact, he believes that this approach has strengthened ABN’s relationships. “By focusing on a smaller number of clients and by looking at the client in a more complete way through the financial markets and financial markets advisory platforms, we have been able to improve the quality of the dialogue with our clients and gain a larger share of their business.”

Career history

Has a BA in Business Administration and an MBA from Nyenrode University in the Netherlands. Member of the eight-strong Group Business Team charged with focusing on the highest value strategic and operating issues, and developing cross-group synergies.

2002: Global head of Financial Markets 2001: Head of Financial Markets and country representative for Japan, based in Tokyo 1999: Managing director. Moves to Singapore as head of treasury and fixed income Asia 1997: Global co-head of interest rate trading in Amsterdam 1996: Chief dealer, cross-market arbitrage, European government bond trading 1993: Senior dealer, marketing financial products 1989: Joins ABN AMRO on derivatives desk 1988: Analyst, Theodoor Gilissen

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