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4 | ifr special report | September 2009 UK

important lieutenants are Frank McKirgan, a former ABN Amro executive who runs the cash equities business and Richard Bartlett, who runs the combined DCM and ECM divisons under the financing umbrella At its first half results, RBS broke down its results by "core" and "non-core" divisions, to reflect a strategy announced in February to rebuild its balance sheet by running down or selling assets and business lines that carry too much risk, or otherwise don't fit in. Its core units made an operating profit of £6.3bn in the first half, compared with £4.71bn in first half 2008. But non-core units lost £9.6bn, from £4.86bn in the same 2008 period. Markets, cash equities, debt and equity underwriting and M&A advisory remain core business. It will stay in the sub- investment grade credit market, but it has pulled out of providing leveraged finance to private equity firms, and scaled back its overall client base and geographic coverage.

Bartlett said: “One consequence of driving into the wall is it forced us to restructure hard and fast. Because of what has happened and our involvement in the asset protection programme, we know how much capital we have, we know we have a clear organised machine to go out and do it.”

Bartlett believes the integration of ABN Amro is starting to bear fruit. “Our traditional trading business may have helped us through in the first half, but our financing businesses are now coming good,” he said. “Companies acknowledge they have to diversify their sources of funding away from traditional bank lending and with the addition of ABN’s business, we now have the full suite of capital markets products to offer our clients.”

The crisis, he argued, brought together

the different factions, but it has taken a while. Legally, the two banks have still to achieve unity, with some staff on different contracts, but Bartlett said the firm now acts as one: “Three months ago, it was possible to see the different attitudes. Now we act as one.”

Rivals argue that, as a lender to many of Europe’s big companies, RBS can dictate where and how it can deploy its balance sheet, giving it a ready-made pipeline of equity and bond deals from companies needing longer-term financing. “Financing in the capital markets will be the mainstay,” said Bartlett. “In Europe, the

bulk of financing comes from traditional bank lending. In the US, the majority come from the capital markets. We believe there will be a permanent shift in the direction of the US model.”

The bank’s role as bookrunner on the US$2.5bn bond issue by Dolphin Energy typifies the new strategy, said Bartlett. Mubadala was one of the bank’s core clients and RBS was an existing lender, but the bank was lead adviser on the structuring of the deal. “It would have been easy to drop out of the flow of activity, had we been distracted. But we thought hard about who our clients are,” said Bartlett.

Its top-five presence in all Thomson Reuters’ bond league tables by currency illustrates its all-round capability following the ABN deal, but its biggest benefit has been in equity capital markets. Bartlett said: “We had no presence in ECM prior to the ABN Amro deal. Of the £44bn in new equity issued by UK companies in the first six months of the year, RBS was involved in un- derwriting £39bn.” A big chunk of that was taken up with one deal – HSBC’s £15bn rights issue. RBS admits its decisions around clients and capital deployment have become highly selective. “Capital is available where we have made specific undertakings to make capital available,” said Bartlett. Despite pulling out of leverage finance for private equity firms, RBS remains committed to non-investment grade. It was bookrunner to Sappi on its high-yield bond and did a similar deal for Virgin Media. At the bank’s half-year results presenta- tion, Hester complained it had suffered from rivals’ poaching raids. Banks that have not accepted government bailouts have been able to set more attractive rates of pay, although they have since been curbed, following an FSA ruling last month. However, Bartlett said his business had

not suffered. “So far this has not proved to be an issue for us. We are expanding in some areas, such as our business that helps clients buy back their debt. Headcount in our corporate bond business is up by 10% and we are also looking to expand in Russia.”

On the offensive

The financial crisis had an equally dramatic impact on Barclays Capital. But whereas RBS’ banking and markets business was transformed by government intervention, massive losses and a management shake-up, Barclays exploited the turmoil to accelerate its plans to

become a full-service investment bank. Barclays Capital signalled its intent when it bid for ABN Amro. After losing out to RBS, its ambition appeared to wane. Then, in early 2008, it hired a team of emerging markets M&A specialists from ABN Amro as part of selective move into traditional investment banking. This was territory it had avoided since vacating it ten years ago with the sale of its BZW subsidiary. Its acquisition of the US and Canadian

investment banking businesses of Lehman Brothers last September gave it a full-service presence in the world’s most liquid capital market. Since then the bank has won high- profile mandates, most notably providing advice and financing to US drugs giant Pfizer on its acquisition of Wyeth in March. Larry Wieseneck, head of global finance and risk solutions at Barclays Capital said: “Nine months ago we were one of the few firms with a genuine plan in the aftermath of the crisis. In 2009, much of our focus has been on levelling the playing field across products in different stages of development. Barclays Capital historically had deep debt capital markets expertise in the sterling and euro markets and the Lehman acquisition significantly strength- ened its dollar market expertise. The result is that today we’re one of the only firms ranked near the top in each of the major currencies.”

The bank argues that having a US presence is an essential pillar to building a global investment banking business. This was absent with BZW.

While BarCap had board backing to buy Lehman’s US business, it had no such mandate in Europe. It attempted to cherry- pick the bank’s best staff, but talks broke down because Lehman’s European management wanted Barclays to buy the entire business – something that Japanese bank Nomura pulled off.

Since then, BarCap has accelerated its expansion in Europe with a series of hiring raids on rivals, in one of the most ambitious expansion drives of recent years. The bank is building equity sales, trading and research, an equity capital markets business and a M&A advisory operation from scratch in Europe. It believes it is two- thirds of the way through its recruitment drive, but realises it cannot compete for the biggest mandates until the entire structure is in place.

“While our ECM business is fully-formed in the US, in Europe we are in build-out mode,” said Wieseneck. “Our expansion in sales and trading and banking continues

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