Commerzbank’s global head of equity derivatives talks to Natasha de Terán about the bank’s expansion plans away from its European strongholds and the secret behind the company’s low staff turnover.
“Anyone that understands equity derivatives, and is able to use them, should use them; evidence has demonstrated that they have a responsibly to do so.”
Such is the verdict of Roberto Vila, global head of equity derivatives at Commerzbank. For Mr Vila and his ilk, that should mean an immense business opportunity, because so far only a relatively small amount of investors have realised this.
He says: “The industry is operating a long way from capacity and there is plenty of room for our client base to expand and develop; in fact, equity derivatives is doubtless one of the biggest growth markets in the investment banking sector.”
Commerzbank is not one of the biggest names in equity derivatives. The French banks – most notably Société Générale, whose equity derivatives reputation has been shaken by a recent trading scandal, and BNP Paribas – have traditionally dominated the market.
Competitor envy
Behind the French follow the likes of Deutsche Bank and UBS in Europe, and the US broker dealers, most notably Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers. But in this intensely competitive – and extremely lucrative world – Commerzbank has carved itself out a nice niche business that some of its competitors might even be jealous of.
Mr Vila ranks his firm as one of the top ten revenue producing equity derivatives players in Europe. “Within the equity derivatives market, people know who we are and we have no problem hiring staff or selling product.
“If others are shouting louder than we are, so be it – I don’t mind; I am focused on the business of doing business, and in the business, people know who we are. That is what is important,” he says.
One of the more unusual characteristics of Commerzbank’s business is its stability. In a world in which staff mobility has been higher than average, he claims that Commerzbank’s personnel turnover is among the lowest in the industry.
The group employs 290 staff in equity derivatives, 42 of whom will have completed 10 years with the firm by the end of the year. With the exception of two managers, who have been at the banks for six and eight years respectively, the team’s entire management structure will have completed 10 years at Commerzbank by the end of 2008.
Global workforce
Competitors would likely rush to attribute this stickiness to the stability of the German employment market – staff in the country tend to be far less mobile than their peers in London. However it would be wrong to attribute the bank’s ability to retain staff to national habits alone: out of Mr Vila’s direct reports, only two are German; and of his entire staff only about half are German.
“To retain staff like this, you have to offer them a competitive remuneration package, you have to have good market presence, you have to give staff responsibility and challenges and you have to have a good working atmosphere,” says Mr Vila. “You need to strike a balance between all of those elements to retain staff.”
While Commerzbank’s US peers have been more actively seeking to attract flow business, the German bank is instead mainly concentrated on the retail side, where it has now established product ranges and distribution channels.
It takes more than an accident of geography to build a good business, but Commerzbank doubtless owes a great deal to its German origins. The market for structured retail products in Germany grew from €2.2bn in 2003 to €57.4bn in 2007, becoming the largest in Europe by some distance. After Germany comes Italy, with a €41bn market, and then neighbouring Switzerland, with SFr30bn ($29.2bn).
Naturally, Commerzbank’s largest retail client base is in Germany – about 55% of its business is carried out there, and it claims a near one-third share of the local flow structure product market. After Germany, Switzerland is the next most significant market for Commerzbank.
Retail business
Half of the bank’s retail business is in structured products and half of it is in high turnover standardised products – mainly certificates and warrants. Mr Vila says that the bank is the clear market leader in the German retail standardised business and number three in France, behind Société Générale and BNP Paribas. In Spain and Portugal, he also claims to be ranked second in the warrants business.
Having established a strong presence in some targeted European markets outside Germany, Mr Vila quite naturally has ambitions beyond Europe and is slowly but “very deliberately” expanding. “It is very easy to overdo it; to rush into a new market too quickly. I am very content to continue to grow my business steadily – without ever moving my eye from the bottom line. We want to grow our business naturally but we are determined to grow while remaining a viable, profitable business – so we are pursuing organic growth with the profit motive at the forefront of our mind,” he says.
Mr Vila’s immediate expansionist ambitions stretch into Asia and the Middle East. A couple of years ago he established a start-up business in Asia out of Commerzbank offices in Hong Kong and Singapore. He now has a small business there, with 20 staff distributing, structuring and trading products.
Reaping rewards
“We have not rushed into hiring vast numbers of staff there but our business has quickly become profitable and is very rewarding – not least because through it we are able to serve both our European clients with Asian products, as well as our Asian clients with European and local products.”
Commerzbank opened a branch in Dubai in January and Mr Vila immediately sent a couple of equity derivatives sales staff there to identify how the bank can best operate. He doubts that it will lead to the same import and export type activity that he has in Asia, but hopes that it will turn out to be a “nice satellite business”.
In 2005, the Boston Consulting Group published a widely read report on investment banking that estimated global equity derivatives revenues would grow by more than fivefold to $20.1bn by the end of 2007.
Banks do not break down revenues by business line so it is difficult to estimate whether they did reach the target but it is a reasonable assumption, given the tremendous intervening growth in turnover in listed, structured and over-the-counter products, that the market at least matched, and more likely exceeded, expectations.
Crowded market
The result is that competition in the equity derivatives business is rife – at home and abroad. Although longer standing than the significantly larger credit derivatives market, it is an attractive, stable and lucrative business, and banks are continuing to build up their franchises to capitalise on further expected growth.
However, Mr Vila is not put off by the competition. He says Commerzbank will continue to hire, if cautiously, and hopes to grow his business by 20% this year. Like many other incumbents, he believes the barriers to entry are quite high.
He says: “As evidenced by the number of firms that come into and quickly exit the market, you really have to have very sophisticated operations to compete in this market.
“Our technology is state of the art; we can quote and risk manage any sophisticated structured product on the market but we do not kill ourselves to win business and compete down to the latest basis point. Instead we decide what we want to do, when, and where we want to do it.”
Despite the extremely complex structuring work that underlies the products produced by his unit, Mr Vila is quick to demystify the business and sees it as being little different from any other product manufacturing business: “You should only take the risks that you need to when putting products together; you should source well, clearly differentiate your product, remain innovative, operate smart systems, keep risk management up to scratch and, of course, constantly find means of doing what you do better and more cost-effectively.”
Job satisfaction
Like all successful managers, Mr Vila has an infectious enthusiasm about his business. He says that it gives him “a rewarding feeling” to go out and solve a problem for a client and believes that equity derivatives is one of the best businesses to run in the investment banking world.
He insists that the equity derivatives business is a very real one related to the real-world: “This is one of the key things that make the business so enjoyable.
“Almost whatever happens in the political and macro sense will impact upon your day; at the same time it is immensely challenging intellectually and very fast-moving – it is very rare for a business to have all of these things and I count myself as being very fortunate to be in it.”
CAREER HISTORY
2003: Appointed global head of equity derivatives at Commerzbank.
2002: Appointed global head of cross-asset structuring.
1999: Appointed regional head of equity derivatives, setting up the structuring operation for the bank’s equity derivatives business.
1998: Joined Commerzbank as co-head of London equity derivatives trading.
1995: Moved to ING Barings Securities in New York as an equity derivatives trader.
1994: Joined Baring Brothers & Co, London.
1993: Gained a PhD in mathematics from University of Oxford in the UK.
1990: Graduated from Universidad Nacional Autónoma de México with a degree in mathematics.
