Foreign banks have for a long time considered the US a highly attractive destination, and for most of them it is their principal market abroad.
According to Dave McKay, CEO of Royal Bank of Canada (RBC), a long-standing appeal is that the US “has some of the largest institutional, commercial and individual profit pools in the world. Therefore it attracts foreign companies [and] foreign banks to compete for those returns”.
Additionally, in the second quarter of 2018 the US economy took off, growing at its fastest annual rate in nearly four years. US GDP increased 4.1%, up from 2.2% in the first three months, according to the US Department of Commerce, reflecting surging exports, strong business and consumer spending, and low unemployment.
Advancing with caution
Some analysts and bankers believe pro-cyclical fiscal stimuli – consisting of a new law in 2018 to cut US corporate taxes, and deregulation (including a loosening of rules for banks) introduced by president Donald Trump’s administration – will help extend the long US expansion into 2019, and offset any drag caused by Federal Reserve interest rate increases. The US central bank has raised rates twice in 2018 and pencilled in two more before the end of the year and three more in 2019.
Still, investors remain wary of rising interest rates, Mr Trump’s talk of trade wars, rising steel, aluminium and farm tariffs, and the increasing costs of raw materials and labour.
The US is also one of the most competitive banking markets in the world. “Foreign banks just do not have the breadth and depth of US banks,” says Stuart Plesser, senior director and bank analyst at rating agency Standard & Poor’s. “Their deposit franchises and their cost of money is not as strong as for US banks.”
Amrit Shahani, lead researcher at Coalition Ltd, which works with banks to track industry trends, says the largest US banks – JPMorgan, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley – have also strengthened their dominant position in the US in the past few years, in relation specifically to European banks. This is because US banks adjusted to the post-2008 crisis, and the US Dodd- Frank Act that followed. They have also invested strongly in technology.
Bankers and analysts agree that operating in an unfamiliar, non-home market is inevitably riskier. Jean-Yves Fillion, CEO of BNP Paribas’ US holding company and head of the US corporate and institutional bank, says: “To make [a foreign bank] a profitable business, you have to approach it in a very thoughtful way.”
So how are four foreign banks tackling the US market and just how important is it to them?
RBC's niche model
Canada’s largest bank, RBC, says the US generates about 23% of its total annual income, and is the market where RBC is growing most. To differentiate itself, RBC has chosen a focused private and commercial, niche banking model, backed up by substantial lending capabilities and co-ordinated brokerage and capital markets businesses.
Mr McKay says: “We are focused on corporate, institutional and high-net-worth individuals who also have a commercial or entrepreneurial franchise. We decided to focus on these client franchises because we have the scale to compete [with our balance sheet]. At the same time, more complex solutions are required, whether it’s a client in the entertainment business, the fast-food business or the technology sector.
“It’s not a high-volume, low-margin business. It’s a low-volume, higher margin, complex, relationship-based business, where [on RBC’s side] creativity, service and personality all play a role.”
The platform chosen for its US franchises – RBC’s institutional and corporate franchise, which is served by the bank’s capital markets arm, and its growing wealth management franchise – is Los Angeles-based City National Bank, which was acquired by RBC in 2015.
Meanwhile, Jim Wolfe, co-head of RBC’s US investment bank, says RBC’s overall share of US investment banking fees in the deepest and most dependable fee pool in the world, across the core markets of mergers and acquisitions, leveraged finance, and debt and equity, grew from 1% in 2007 to almost 3%, or C$3bn ($2.29bn), by the end of June 2018, one of the fastest increases of any bank in the decade. Approximately 48% of RBC’s worldwide capital markets business is now generated in the US, according to the bank.
BNP Paribas' universal route
BNP Paribas adheres to a universal banking model. Mr Fillion, CEO of the overall US business, says: “There are challenges to operating as a foreign banking organisation in the US today. Under the current set of rules [requiring foreign banks to consolidate their assets] in intermediate holding companies (see chart), a single-activity bank can be a complicated business model. Having a more diversified, liquid and steady ‘universal’ model like we have does help, however. The combination of activities [of retail and wholesale] provides a stable source of capital and local funding, and diversifies risk.”
He adds that the US platform is roughly a $6bn-a-year revenue business, which is evenly distributed between retail and wholesale, employs 16,000 people and is growing. “The US is the largest balance sheet allocation of the group after France and it is strategic to the group, generating between 15% and 17% of worldwide revenues,” says Mr Fillion.
The main platform of the retail franchise, San Francisco-headquartered Bank of the West, is a regional bank with customers ranging from individuals to small, medium and large companies. It also has a nationwide wealth management business that recently opened a branch in New York, strengthening coordination with the corporate and institutional bank (CIB) – the investment banking arm of BNP Paribas’ US operations. In the second quarter of 2018, US private bank revenues grew 6% compared with the same three months in 2017.
The US CIB, meanwhile, provides a full service (debt markets, securities, financing, treasury and advisory) to both European companies and institutions wanting to tap into the deep US investor markets, and to US customers and business clients wishing to invest in the eurozone. Mr Fillion says this transatlantic business has been growing in the past three years but emphasises, however, that “as a US platform owned by a European bank the strategy is not to be everything to everybody”.
“You have excellent banks here that do the job and it’s a very competitive marketplace,” he adds.
So the US CIB focuses on products where it has strengths. Recently that has meant selling derivatives, a traditional speciality of the French bank. “We are one of the most active firms in derivatives and swaps across rates, commodities, currencies, equities and in hedging strategies. There’s a large demand from our clients for [these hedging strategies] in the US now because volatility is back," says Mr Fillion. (Commentators attribute this to escalating trade tensions, rising US interest rates and growing differences in the economic performance of the US and the rest of the world.)
Meanwhile, the specialty of Bank of the West, the retail franchise, is servicing the farming sector, where it ranks third in the US and has a particular strength when it comes to lending to wineries. “With a bank based in California and French DNA, how could they not have a strong franchise in wine?” quips Mr Fillion.
Deutsche moves to staunch losses
Deutsche Bank USA is coming from a different situation. The German bank is in the throes of yet another restructuring to restore profitability after three consecutive years of losses, a ratings downgrade by S&P and failing the US Federal Reserve stress test. According to the plan of Christian Sewing, appointed Deutsche Bank’s CEO in April, the bank will aim to grow its lower risk and more stable revenue businesses of private and commercial banking, asset management and transaction banking (which includes cash management for companies and trade finance).
At the same time, it is shrinking and significantly cutting costs at some US investment banking and trading businesses, with US foreign exchange rates (a bond market), equities prime services and cash equities singled out as targets by Mr Sewing at Deutsche Bank’s annual meeting in Frankfurt in May. The bank has already cut one-quarter of the staff in the global equities business as part of a wider effort to shed more than 7000 jobs by the end of 2019.
Other specific changes in the US include moving Deutsche Bank’s New York headquarters from the iconic Wall Street to Columbus Circle and closing the bank’s Houston office as Deutsche Bank cuts back on its investment banking coverage of the US oil and gas sector. Mark Fedorcik, co-president of Deutsche Bank’s CIB and head of corporate finance for the Americas, says that in some businesses, restructuring is already finished. “From a US corporate finance perspective, our restructuring has been done. We did it mostly in the second quarter [of 2018]. Now its all about business, focusing on our clients and generating meaningful flow,” he adds.
There are also plans to expand in areas where the bank has competitive market shares in the US – one being US leveraged loans, where the market share in the second quarter of 2018 was back up to about 6%.
“We see an opportunity to do more with our defined client base by focusing on our strengths, such as leveraged finance and industry expertise within areas such as industrials, real estate and technology, media and telecoms,” says Mr Fedorcik. “We did a significant amount of hiring last year in areas such as financial institutions, technology and healthcare, which is starting to pay dividends for us. In healthcare, we’ve already doubled our market share since last year.”
Deutsche Bank’s attempts to break into US markets (widely considered an essential plank for delivering a global investment banking platform) have proved costly, as the bank ended up paying billions of dollars to settle US regulatory violations. Deutsche Bank was found to be involved in major scandals going back to the 2008 crisis, from the fraudulent sales of mortgage-backed securities to settling a $205m fine in June for playing a role in the manipulation of benchmarks to determine interest rates on numerous financial products. However, Mr Fedorcik says that regulatory issues are “becoming less of a distraction”.
Until 2010, Deutsche Bank was in the top five banks in the US by investment banking revenues, keeping pace with the likes of JPMorgan and Goldman Sachs. But in 2017, according to Coalition, it slipped behind Barclays and Credit Suisse to rank eighth in the US.
Santander's overhaul
Deutsche Bank is not the only foreign bank to experience problems with US regulators. Spain’s Banco Santander has made significant progress after a three-year turnaround effort. However, it is not entirely out of the woods on regulatory issues at its US mainland operations: its Dallas-based consumer finance business, Santander Consumer; and Santander Bank NA, a retail and commercial bank headquartered in Boston that has 670 branches covering the economically vibrant north-east.
The overhaul began with significant changes to the boards of the US businesses, introduced shortly after Ana Botin became executive chairman of Santander Group in 2014. Following this, the US management team was thoroughly reshuffled by Scott Powell, a former JPMorgan executive, who took over as CEO of both Santander Consumer and Santander Holdings USA in January 2015. Mr Powell says he was brought in because of the regulatory issues but also because Santander Bank NA was underperforming.
Good news has been accumulating throughout 2018, however. Santander Bank NA obtained an upgraded Community Reinvestment Act (CRA) rating, which is important as low CRA ratings place limits on a US bank opening new branches or taking more deposits. According to some commentators, the upgrade also improved the bank’s image following a March 2017 $25.9m fine of Santander Consumer because of predatory behaviour on subprime auto loans.
Meanwhile, in June Santander Holdings USA passed the Fed’s annual stress test, which enabled it to pay a dividend to the group and repurchase stock. It was the second year in a row that the US bank had passed the Fed-supervised Comprehensive Capital Analysis and Review, including stress testing of its resilience in a hypothetical economic downturn, following three years of failures, a high rate for the US industry.
Added to that, though Santander Holdings USA accounts for only 7% of Banco Santander’s total group profits, according to the Spanish bank, the combined profits of the US retail and commercial bank, and Santander Consumer, have grown at the fastest rate within the group, by 53.7% to $405m from January to June 30, 2018, compared with the same six months in 2017.
Santander Consumer, which has a large business partnership with Chrysler Fiat, providing mainly wholesale financing for Chrysler customers and dealers, as well as a very large indirect auto loan business of its own, “is far and away the biggest profit driver in the US”, according to Mr Powell. Santander Consumer’s total auto loan originations in the second quarter of 2018 amounted to $7.9bn, up 45% compared with the same period the previous year. The consumer bank also issued $3.5bn in asset-backed securities in the same three months and is one of the largest (if not the largest, according to some estimates) issuer of subprime auto loan securities in the country.
The bank’s core speciality is subprime auto lending. “This gets a lot of bad publicity because of its association with the subprime mortgage lending before the 2007-08 financial crisis,” says Mr Powell. “But if you look at the make-up of the US population, depending on where you set the bar, about 40% of Americans, or more, would be labelled non-prime.
“We are not predatory. We definitely take the view that it is a reputable business providing funding for people to get cars. This is the US: 85% of Americans drive to work every day.”
