The fourth floor of the Seagram Building at 375 Park Avenue, New York, is home to a brand new equity trading floor. One wall features a large light installation, in which gently undulating waves move across the wall and the whole thing changes colour periodically – apparently, it’s called a Waquarium.
This, along with two other floors of sales and trading, is the new Manhattan home of Wachovia’s corporate and investment bank. It has also leased a further two floors at 375 Park Avenue into which it will eventually expand. “We moved in the first quarter and it’s awesome,” says Stephen Cummings, head of corporate and investment banking. “It’s a wonderful location and a wonderful space.”
The bank is headquartered in Charlotte, North Carolina, with much of the division still based there, but 700 staff started moving into the Manhattan office at the beginning of 2006. Some transferred from its former equities operation in Baltimore, now closed, but many are new Manhattan-based hires the bank has made over the past 18 months in its bid to give the rest of Wall Street a run for their money in equity capital markets and investment banking.
Wachovia has been an established force in fixed income for about three years now, but a year and a half ago, the bank took a big punt when it decided to invest in the significant trading and research infrastructure necessary to run a successful cash equities business. This was at a time when competitors such as Wells Fargo were retrenching.
Wachovia has also made lots of senior hires in equities and investment banking. These include Quinten Stevens, JPMorgan’s former co-head of US equity capital markets, who joined to spearhead the push in equities last May, and Jonathan Weiss, who joined last June from JPMorgan to head the bank’s financial sponsors group. Wachovia has been luring away high-calibre people from other banks ever since. As a result, non-interest expense was up 24% in the second quarter of 2006 over the same period in 2005, primarily due to all the strategic hiring in 2005 and higher bonus payouts.
But the gamble appears to have paid off. Last year, Mr Cummings announced that he wanted to double market share of the corporate and investment bank over next three years, from its previous level of 3%. “We’re still on track with that,” he says. “We’re not only pleased with our market share growth; we’re very pleased with our bottom line performance.”
Record earnings
In fact, the corporate and investment bank clocked up record earnings in the second quarter of 2006 of $522m, up from $517m the previous quarter and just $355m for the second quarter a year earlier. Fee income was up 54% over the same period, with principal investing, structured products and advisory particularly strong, though it slipped 2% compared with a particularly strong first quarter in 2006 because of lower trading profits and weaker investment grade results.
In equities, Wachovia has already surprised a few long-established Wall Street players. According to Dealogic, the bank has moved up the US equity bookrunning league tables from 13th place in 2005 to 11th so far this year (see table), overtaking Bear Stearns on the way. “On the origination side, we’re definitely up year-on-year, but it’s a tough trading environment,” says Mr Cummings. “The first quarter was strong, the second quarter was tough and I think you’re going to see that as results come out for a lot of people.”
The equities outlook for all Wall Street firms for the second half of the year is less certain, with the sell off in the market and many initial public offering (IPOs) being pulled or postponed. As The Banker went to press, Wachovia had a backlog of 12 IPOs on which it had bookrunning mandates, which it is hoping to launch in the third quarter when equity market volatility settles. Two years ago, competitors were saying that Wachovia was not strong on institutional distribution and was overly reliant on retail distribution through its brokerage division. That perception has changed, but when the institutional markets are tough, Wachovia sees its traditional ability to sell to retail as a useful risk mitigant.
Mr Cummings says the bank has also had a record year in mergers and acquisition (M&A) advisory so far this year. It may have only advanced one place in the M&A adviser rankings for deals with US targets compared to the full year in 2005, but it has increased its market share significantly from 4.3% to 7.3%, and has done better so far this year than other banks trying to exploit the US M&A boom such as Deutsche Bank.
Wachovia has also tapped into the rich vein of fee revenue from US private equity firms since it hired Mr Weiss last June. The group has worked on some of the biggest US leveraged buyouts (LBOs) of the past few months. It was one of five advisers to the private equity consortium that bought LA-based Spanish media company Univision and worked on the $10bn debt financing. “The Univision LBO is a kind of a breakthrough transaction for us,” says Mr Cummings, “and there are a couple of other significant deals that haven’t been announced yet where we have lead positions.”
As well as equity capital markets and investment banking coverage teams such as financial sponsors, some fixed income trading and half of the equity research team are also based in Manhattan. It is part of the bank’s push to hire where the best talent is. “In some areas, we prefer to have people in Charlotte, but in all cases we’re going to go where we can find them. If you look at our recent hires, it’s pretty balanced between the two locations,” says Mr Cummings.
New business
Wachovia is adding new businesses too. This year, for example, the bank set up a new project finance business, which Mr Cummings sees as a natural progression from its existing structured products strength. In June, it hired two new managing directors from Société Générale to lead the new group: Roger Bredder in Charlotte and Jeff Wood in New York.
But in Europe and Asia this year, the focus has been on expanding its structured products offering in those markets. “In Asia, we’ve put in place a pretty significant real estate team and our collateralised debt obligaton (CDO) business is investing in resources in Hong Kong and Singapore,” says Mr Cummings, who believes there are a lot more growth opportunities there. “We’ve been distributing a lot of products to those markets already so our name is pretty well known. Now we’re bringing in more people and we’ve won some very exciting mandates.”
In Europe, the bank has also concentrated on developing its structured products, real estate and ABS CDO business, which the bank chief says all had a blockbuster year last year and are also doing very well in 2006. In March, the bank hired Atul Bajpai, formerly global head of debt principal finance, asset-backed conduits and securitisation at Dresdner Kleinwort Wasserstein (now Dresdner Kleinwort), for the newly created role of CEO of the corporate and investment bank in Europe. “Atul really is a structured products specialist so that’s the flavour of what we’re investing in.”
The bank’s decision to focus its international expansion to date solely on fixed income and real estate, and the fact that it has made little dent in the league tables in Europe or Asia so far, has led to some criticism of its overseas strategy.
But Mr Cummings is quick to defend the bank’s cautious growth: “Some would say we’re not very international yet, but we are investing in Europe and Asia, and it’s just another growth opportunity. Where we are now, we don’t see the logic of launching all missiles in Europe. We’re going to be very targeted, we’re going to build it around things we’re very good at, where we know we can make money.”
And although Wachovia has been growing its presence in retail banking with its announcement in May that it will purchase California-based Golden West Financial Corporation for about $25bn in cash and stock, and the bank has the balance sheet strength to make more large scale acquisitions, Mr Cummings is adamant that there are no plans to consolidate its corporate and investment banking position by buying businesses. “Ken Thompson [Wachovia’s chairman and CEO] continues to say that’s not in the game plan and if you look at results, there’s no justification for that.”
Cross-selling opportunities
With one of the biggest retail banking franchises in the US behind it, along with the cross-selling opportunities provided by its large retail brokerage division, Mr Cummings says the bank is happy with the clout it has. “We’re still in growth mode, but with the Golden West deal, Wachovia is a $100bn-$110bn market cap company with huge financial resources and we touch a lot of different people through our different divisions. When you look at our balance sheet, our distribution and our structured products expertise, we’re as good as anybody.”
Internally, the corporate and investment bank is contributing a much bigger chunk of Wachovia’s total revenues. This time last year, the division accounted for about 25% of the bank’s total revenue pool, but in the second quarter of 2006, revenues from the corporate and investment bank were up 32% over the second quarter last year and its earnings were up 47%.
On Wall Street, competitors are unlikely to be losing sleep over Wachovia’s corporate and investment banking market just yet, but given that it is “still in a growth mode”, it has a sizeable advantage over more mature businesses on the street. Other banks would do well to keep an eye on it.
CAREER HISTORY
2001: Head of corporate and investment banking at Wachovia (on its merger with First Union)
2000: Head of corporate and investment banking at First Union
1998: Bowles Hollowell merged with First Union. Became head of capital markets at First Union
1993: Chairman and chief executive officer of Bowles Hollowell
1984: Joined Bowles Hollowell
1979: Began investment banking career, joining corporate finance division of Kidder Peabody in New York
