In the same week that the marbled halls of JP Morgan’s old headquarters on Wall Street were being sold to a development company, Walter Gubert laid out the investment bank’s strategy to Brian Caplen and Geraldine Lambe in his much more functional London office.
Mr Gubert is feeling relatively upbeat. For the first time JP Morgan has achieved top three league table status concurrently in global announced M&A, global long-term debt, and global equity and equity-related underwriting. It also posted an operating income for the first quarter that was 22% higher than last year and a return on equity of 20%.
Ironically, Mr Gubert attributes this – in part at least – to the downturn that has otherwise been so damaging to investment banking. He says that the “excesses of the ’90s” mean that companies are being more careful about what they do, how they do it and with whom they do it; they also have less business to give out. The overwhelming result is that clients are working with fewer banks.
“There is a tendency for clients to work with firms that are broad in terms of their capabilities and in terms of their muscle. It becomes more difficult for firms that can only deal with 20% of their needs,” he says. “This plays into our hands. If we have gained market share in the last year or two, it is precisely because of that phenomenon.”
Mr Gubert dismisses the popular perception that JP Morgan has not been a major player in M&A, but admits that during the past five years, it has not been one of the top equity houses. This is changing, he says, citing the bank’s march up the league tables.
This development, too, is because the market is playing to JP Morgan’s structured finance strengths, Mr Gubert says. In the past 18 months there have been fewer plain vanilla cash deals and a greater need for convertibles and other more structured equity products – an area where he believes the bank can offer serious expertise.
“Clients might say they need more capital. That used to mean issuing more equity; what it means now is finding the most effective structure, which creates a stronger capital position or otherwise improves their risk profile. The answer to this is more complex and multi-faceted than it used to be, and that is where we have an edge.”
As with all investment banks, JP Morgan’s mantra revolves around client centricity and a single relationship manager. Mr Gubert says, of course, that the bank wants to differentiate itself by being more client-driven than the rest. “All deals must be overseen by the client specialist. That’s our credo,” he says.
Managing client relationships
Fundamentally, there are four major client groups within the bank: financial institutions; public sector; real estate; and corporates. Mr Gubert says the Financial Institutions Group (FIG) has always been the bank’s most important and largest client segment, and is clearly its key focus. (Which perhaps sheds light on why the bank disbanded its corporate structured finance team and “redeployed” its resources across the other client groups in May. Although this does not amount to a withdrawal from corporate securitisation, says Mr Gubert, merely that corporate clients will access those services via different channels.)
Within the FIG, which contains issuers and investors, it is the latter that have been the growth engine during the past year, through the sale of portfolio management services and structured products. Although JP Morgan offers no figures to support this, Mr Gubert says that all client revenues remained flat last year compared to the previous year – no mean feat in the circumstances – and that a major reason for this was the big growth in investor business.
To achieve this, the bank has driven the single relationship manager model in the investor group (headed by Tony Best) in the past year. It has not been easy. “It is very difficult to do because, particularly on the investor side, there are very strong relationships between product specialists and investors,” says Mr Gubert.
“There is often resistance on the one hand and a lot of specialisation and complexity on the other. I feel good about the increasing level of integration at JP Morgan.”
He says it has taken determination to show that the bank wanted to manage the business in this way. The change has been executed from the top. The issue revolves, naturally, around how performance and results are measured. “When you talk products, you tend to measure performance ‘right now’; when you talk clients, there is a greater focus on the long term,” says Mr Gubert. “The difficulty is in giving the relationship manager the power and the clout to make sure you get that balance.”
To square this circle, JP Morgan has instituted a review process. The bank defines its short-term and long-term objectives with a client, and each year makes an assessment of how well it has done in achieving those aims; this is combined with client feedback and then translated into a judgment of individual and team performance. It is this that determines the bonus. “You have to be crystal clear that this is what you want – or you are not going to succeed. More often than not in our industry, you don’t. What you get is ‘I’m going to do the deal today, because then I know I’m going to get rewarded’,” says Mr Gubert.
Breaking down the walls
A crucial element of building the team approach has been to break down the barriers between product silos. That has been done through a review of the company’s top 50 clients.
During the past several months, the European executive committee – heads of business chaired by Mr Gubert – interviewed the person responsible for the relationship with each of the 50 clients and the team of product specialists supporting that person, to discuss how they were doing with the client and what the challenges were.
Mr Gubert believes this laborious process sent out a clear message that client relationships had to be developed in an integrated way. “If we get the sense that certain products are not participating, we correct that,” he says.
The most interesting conclusion has been that, almost across the board, the bank could be doing more business with every client, he says. “This reveals that you have to find out what the client needs and to form a response; it means being there to solve problems, not to sell products, and it typically involves more than one product group. But that is what innovation is all about – combining different parts of the firm. I have a hard time thinking of one innovation in the past 10 years that did not come from the sharing of expertise.”
The review process has been judged to be so productive that it will be repeated – first with the same clients to see how it has improved business, and then broadened out to include more clients.
Successful merger
Mr Gubert acknowledges that the merger between JP Morgan and Chase Manhattan was not plain sailing. But, while levels of integration differ from region to region, ultimately it has been successful because it brought together advisory and credit houses, and also complementary products, he says.
“We thought that one area where we would lose out would be derivatives because they were both big businesses. In fact, it has been the opposite: JP Morgan had the more structured end, while Chase had more of the flow business. To be a market leader you need both.”
The merger also forced a sort of prescience on the firm, in that it had to make staff and other cuts earlier than other banks, says Mr Gubert. Areas such as research have had resources and compensation shrunk to fit appetites and budgets. “Industry-wide there is a focus on the best research. There was too much around, which nobody read and nobody wanted to pay for,” says Mr Gubert.
Equally, the bank’s hub and spoke model – with product specialists based in London and client managers based locally – means that the structure for building European business is a “lean” one.
He believes that the firm has put in place a cost structure that is in line with expected 2003 revenues, and that it is now in a position where it will not have to keep cutting. “Although if business gets worse longer term, we will clearly have to revisit that,” he says.
Current role:
As chairman, Mr Gubert has direct client and transaction management responsibilities; oversees lines of business including advisory, M&A, securities underwriting and private equity; member of the firm’s executive committee and chair of the European executive committee.
Career history:
1995: Appointed senior executive for Europe, Middle East and Africa.
1991: Responsibility extended to encompass all investment banking activities in the region.
1989: Appointed senior executive in London and put in charge of M&A in Europe.
1973: Joined JP Morgan as a European chemical analyst.
1973: MBA from INSEAD, Fontainebleau, France.
