Staying Power?

Rivals scoff at Deutsche Bank’s investment banking inroads in Asia. Perhaps they should sneer less and worry more.

While visiting his firm’s Hong Kong outpost in June, the CIO of a leading U.S. money manager stopped for a beer at a favorite watering hole in the financial district, the Captain’s Bar at the Mandarin Oriental hotel. No sooner had he sat down than the head of Deutsche Bank’s equity operation, Edouard Peter, was at his elbow. “Suddenly, champagne was flowing everywhere,” mutters a competitor who heard about the meeting afterward. “I’m not even sure we knew the CIO was over here. Somehow Peter did, and he was straight there. You have to take your hat off to him: He’s a good client man.”

Clients all over Asia have been getting a bubbly hello lately from Deutsche Bank salespeople and bankers. Long known in Asia as a derivatives and bond house, Deutsche has revamped its equity sales and corporate finance operations in an all-out bid to barge into the top tier of the global giants invading the region: Citigroup/Salomon Smith Barney, Credit Suisse First Boston, Goldman Sachs Asia, J.P. Morgan Chase & Co., Merrill Lynch & Co. and UBS. “We want to dominate equities in Asia,” proclaims the 37-year-old, Swiss-born Peter.

That has an oddly familiar ring. Back in 1996 Deutsche Morgan Grenfell, the then-incarnation of the big German bank’s securities operation, more than tripled its Asian equity sales force, to 140; built up a regional investment banking team that eventually numbered 170; and spent millions to lure equity research stars. But deal flow was sluggish, and in late 1997 the Asian financial crisis erupted. Deutsche ended up firing about half its Asia staff and shut offices in India, Indonesia, Malaysia, South Korea and Thailand.

So some caution is in order. All the same, what Deutsche has accomplished in Asia this time around is impressive, and it is causing the bank’s competitors more than a little consternation. The boyish-looking Peter -- whom a rival describes as the nearest thing Asian equities has to a rock star -- has led Deutsche from also-ran status two years ago to third-largest stock brokerage in the region by market share, behind UBS Capital Asia Pacific (HK) and Morgan Stanley.

Meanwhile, Peter’s colleague Frank Nash, head of Asia-Pacific investment banking, has unabashedly -- and controversially -- deployed the $960 billion balance sheet of the Frankfurt-based parent bank to make Deutsche an increasingly competitive equity underwriter in the region (though it remains sixth in the most recent league tables). Recent plum assignments: leads on equity deals for Taiwan’s fourth-biggest bank, First Financial Holding Co., and for Malaysian conglomerate Renong Group. And in September, Deutsche won a management spot on the $3 billion privatization of the mainland’s largest insurer -- Beijing-based China Life Insurance Co. -- a coup that should help foster the bank’s grand ambitions in China.

In mergers and acquisitions Nash and a key hire, Anthony Steains, who left as head of the mergers group at ING Barings to join Deutsche as M&A chief in late 2000, have built the merger department basically from scratch into the region’s second-most-active merger adviser: This year the bank, aided by a well-oiled Australian effort, worked on $12.05 billion of transactions -- just behind J.P. Morgan’s $12.08 billion.

“We are already a leader across the transaction banking and global markets businesses -- in debt products, risk management, derivatives and foreign exchange across Asia,” brags Peter’s and Nash’s boss, Kenneth Borda, who ran Deutsche’s Australian and New Zealand businesses before assuming the post of regional CEO in July 2002. “We’ve made rapid progress during the past two to three years in building up our franchise in equities, equity capital markets, corporate finance and M&A, and our focus is on ensuring that they, too, reach and maintain consistent top-three positions in Asia-Pacific.”

Such boastful talk at once irks and unnerves Deutsche’s rivals in Asia. The bank, after all, represents a rich, powerful global enterprise with 5,000 employees spread across 15 countries in the region, including Vietnam. Competitors sense that Deutsche paid too dearly for talent -- much of it snatched from them -- and, worse, that the bank is wielding its parent’s massive balance sheet like a checkbook, offering lowball pricing to pile up deal mandates quickly and bedazzle prospective clients. “They’re buying business,” declares one banker. “They either use their capital, or they go in with very low fees.”

What’s more, detractors say, Deutsche’s pervasive sales culture is causing internal strains and has already contributed to the departure of several well-regarded analysts. Skeptics say it’s only a matter of time before the bank’s richly compensated salespeople, traders and bankers begin to grab at brass rings elsewhere or a significant trading or underwriting loss sours Frankfurt’s appetite for Asian risk. Says the head of equity research at one big Asian bank, Deutsche is either “a horrible competitor to us or a train wreck in the making.”

The bank’s Asia executives swear they won’t repeat the 1996 fiasco. Nash contends that Deutsche’s Asian equity and corporate finance units are in fact profitable and that they’ve actually cut costs in each of the past two years. He dismisses as greatly exaggerated his competitors’ accusations that Deutsche has bought business and lavished huge guarantees on rainmakers. “Our competition likes to have a swing at us and say we spend tens of millions of dollars and that it will all go boom,” adds Peter. “It’s good that they think that, because it means they don’t take us seriously.”

That could be a mistake. Deutsche’s size alone gives it a formidable advantage in offering a truly full-service approach to Asian prospects. “The American firms like to come in and try to do the top 2 percent of a client’s business,” says Jonathan Paul, who runs the bank’s Asia-Pacific global markets group. “We go to the client and say, ‘We want to do all of your business.’”

In their pitches Deutsche’s equity salespeople and investment bankers in Asia can leverage off Paul’s well-established global markets operation. Its foreign exchange, interest rate and credit hedging and asset and liability management components have doubled sales in the past four years and now generate about half of the investment bank’s Asia revenue, one banking analyst estimates. Bankers and salespeople can also trot out Deutsche Asset Management -- now the fourth-largest fund manager in Asia, with $61.6 billion in assets, according to this magazine’s Asia 100 ranking (Institutional Investor, September 2003). In addition, they can provide cash management and other transaction banking products. Deutsche’s overall Asian effort, from investment banking to commercial banking to asset management in all of the 15 countries (including Japan), generates about 10 percent of the bank’s roughly $30 billion in annual revenues and what analysts estimate to be a slightly higher proportion of its profits.

AS RECENTLY AS TWO YEARS AGO, MOST ASIAN investment banks didn’t take Deutsche seriously -- or have any reason to. When Nash arrived in Hong Kong from New York in March 2000, Deutsche was trying to pull together the remnants of its Singapore-based Asia operation and the narrow, Hong Kongbased business of Bankers Trust Corp., the U.S. bank that Deutsche bought for $10 billion in 1999. Bankers Trust focused primarily on derivatives and risk management. Nash, now 51, had worked at BT since 1986 as head of global transportation and aerospace lending after a ten-year career in the U.S. foreign service. Still reeling from the Asian financial crisis, both Deutsche and BT had all but shut down their regional equity capital markets groups: Between them they had one M&A banker.

“We’ve built a Greater China team, we’ve rebuilt our Korea team, we’ve rebuilt our equity capital markets team, we’ve rebuilt an industry group, and we’ve built an M&A department,” Nash says. “In most of those cases, it took us 12 to 18 months to hire the right senior people.”

Nash had his cadre of carefully chosen investment bankers focus on a select group of big, active clients in East Asia, Australia and Japan, whittling the list down to 100 top customers. The bankers assembled a second-tier prospect list of 200. The A-list included Singapore’s DBS Group Holdings, Telekom Malaysia and the mainland’s PetroChina Co. The bank’s strategy with target accounts is to roll out its panoply of services, thereby making use of the resources and, above all, the relationships to be found in Deutsche’s many individual businesses. “We aggressively take advantage of entry points that the entire platform has,” explains Nash. The bank now has 250 investment bankers in Asia.

Rather than champagne, Nash uses Deutsche’s substantial financial resources to ply prospects. “We do try to steer our balance sheet to a list of clients that we carefully select,” he says candidly. “We’ve made it known globally that the firm uses the loan book as a customer-facilitation service.” Nash maintains that Deutsche doesn’t differ from any other global investment bank in this practice. “The equity business is increasingly becoming an at-risk business -- meaning at risk for the underwriters,” he says. “Any time anyone does a block trade, they’ve used their balance sheet.”

Deutsche can invoke its balance sheet on a client’s behalf in any number of ways: buying whole issues outright to ensure a good price, making an accompanying loan to sweeten an underwriting proposal, investing alongside a client. Last May, for instance, Deutsche elbowed aside Goldman in the scramble to advise a consortium led by Singapore’s government-owned Temasek Holdings on its $350 million purchase of a 51 percent stake in Indonesia’s fifth-largest bank, PT Bank Danamon Indonesia. The Indonesian Bank Restructuring Agency demanded that Temasek have a bank as its equity partner. Deutsche was happy to oblige with an offer to invest an undisclosed sum; Goldman apparently wouldn’t match it. (The U.S. firm declined to discuss the matter.)

Such above-and-beyond assistance goes down well with clients. Just after 9/11, Deutsche guaranteed the placement of about $550 million from a $1.2 billion share sale by DBS, recalls the Singapore banking group’s chief, Jackson Tai. “The markets were extremely volatile and uncertain, but Deutsche Bank stepped up and said they would guarantee the issue,” he says. “No other leading bank was prepared in this choppy environment to use their balance sheet to back our transaction.”

It is Deutsche’s pay-for-play tactics that most gall competitors. They reserve their most withering criticism for two deals: Taiwan-based First Financial’s $700 million global depositary receipt issue in July, which the German bank won after First Financial removed Citigroup from the lead position; and Renong’s $156 million sale in June of a 6.2 percent stake in Malaysia’s second-largest bank, Commerce Asset-Holding, a deal that Deutsche wrestled away from J.P. Morgan. Although neither Citigroup nor Morgan would comment, investment bankers at other Deutsche rivals charge that the German bank snatched the business by, in First Financial’s case, providing more generous pricing for the GDR and, in Renong’s case, by guaranteeing that the bank would be able to sell the Commerce stake for more than the agreed-upon minimum price. In the First Financial deal, says a competing banker, “we agreed with Citigroup’s assessment” that a lower price was called for.

Nash confirms that Deutsche arranged a block trade so that Renong could safely sell its position in Commerce, but he insists that the transaction involved an acceptable amount of risk. The block trade, he notes, was successful. As for the speculation that Deutsche provided a guarantee on the First Financial deal -- that is dead wrong, says Nash.

“First Financial was a book-build transaction with a full-blown road show; the deal was not backstopped,” emphasizes the Deutsche banker. “If it had been, we would have had to disclose that in the Taiwan filings. We told the company where we thought the deal would get done, and it got done within that range. We weren’t asked to hard-underwrite it.”

Nash adds: “Suggestions of fee-cutting simply do not stand up to scrutiny. On the equity side almost all major transactions involve more than one bank, and the terms are identical for all. On the M&A side Asia is a very competitive market, but our fees are at those market levels. When we are particularly aggressive, it is usually for existing clients, where we want to remain the preferred provider, and also where there may be some financing opportunities related to an M&A assignment.”

The risk in aggressive pricing, says a consultant, is that “word gets out” and every issuer starts to demand similar terms. And if risk isn’t priced properly, he says, “inevitably, you are going to lose money.” Asks a banking rival: “Is that sort of pricing sustainable in the long term? Lots of people have started out that way and have ended up getting out of the business.”

Despite its deep pockets and a growing portfolio of mandates, Deutsche hasn’t joined Goldman, Citigroup or Merrill in the uppermost ranks of equity underwriters in Asia. That will take time, Nash concedes: “You can sell derivatives [to a company] at a treasury level, but primary equity product requires a broader management relationship.” Because so many Asia-Pacific assignments are driven by governments, “you need to convince governments to hire you,” he says. “And that takes a while. It is a complex process, and governments are particularly sensitive to league tables and track records, because they want a safe and most defensible choice.”

Certainly, that is true of Beijing, and that may help explain why Deutsche is hell-bent on ascending the league tables like a Long March rocket. Arguably, Nash’s most important hire has been Lee Zhang, Goldman’s second-most-senior official in the region, who -- after 18 months of courtship -- joined Deutsche to run its Greater China group in early 2002 and was soon named chairman of the bank’s mainland business.

Lee, who’s extremely well connected in Beijing, has had an immediate impact on Deutsche’s China push. He won an M&A advisory role from Beijing-based PetroChina, which Goldman had taken public in April 2000, and also worked with Huaneng Power International on its $289 million acquisition of Shenzhen Energy Group Co. in May.

Rivals, however, say that Lee’s biggest triumph was snagging the mandate for China Life’s global offering in Hong Kong, slated for sometime in the next few months. The deal lends credibility to Deutsche’s Asian equity capital market effort: Virtually nonexistent three years ago, it has expanded greatly, despite the sixth-place ranking. “One of the things we had to overcome in winning mandates in China was the fact that we hadn’t book-run a major China privatization in some time,” says Nash. News that Deutsche clinched the China Life deal has already opened the door to more mainland business. Market sources predict that Deutsche will participate in a $1 billion share sale for China Minsheng Banking Corp. -- the largest of China’s five listed banks -- and in a similar-size deal for Shanghai-based Semiconductor Manufacturing International Corp.

The China Life coup gives the bank a much higher profile on the mainland, where Deutsche wants to deploy more of its multifaceted investment banking operation. In August the bank was granted a license as a qualified foreign institutional investor, which allows it to buy local A shares on the Shanghai and Shenzhen exchanges. Lee also plans to create a joint venture investment bank with a local firm so that Deutsche can begin to pursue mainland deals. The bank is already licensed to deal in the domestic currency, the renminbi, in Shanghai and to offer Internet cash management services to multinational clients.

Nevertheless, Deutsche has employed a “conservative buildup” strategy on the mainland, says the 38-year-old Lee. The bank has waited patiently to assess what impact China’s joining the World Trade Organization in 2001 will have on deal-making opportunities and to learn its Chinese clients’ plans.

LIKE NASH BEFORE HIM, PETER FOUND IT NECESSARY to rebuild his group -- which embraces equity sales and trading and related derivatives and research -- from the ground up. Although Deutsche had a sizable equity sales and trading staff in Asia when he took over two and a half years ago, it was faring dismally in the league tables: 15th in brokerage in Hong Kong, 10th in South Korea and 14th in Taiwan. “Asia was not on the map” for Deutsche’s global equity sales and trading effort, says Peter, who headed the Swiss sales team at SBC Warburg before joining Deutsche in 1999 to run its 107-member Swiss equities group.

Of the 246 people he inherited at the German bank’s Asia operation, Peter got rid of all but 26. In a nasty market downturn, he was able to assemble what appears to be one of the most productive institutional sales and trading forces in Asia, now numbering 300 people. Among his highest-profile hires: Merrill Lynch director of institutional sales Jeffrey Chung, who heads the Asia sales team; top Goldman equity salesman Punit Khanna; and ING Barings star proprietary trader Warren Primhak.

Peter has propelled Deutsche up the ranks of Asian brokerages. In Hong Kong the bank was the top foreign firm in market share for equities trading in the first quarter, according to the most recent figures available. In Korea its market share soared from 6 percent (and tenth place) in 2001 to more than 12 percent (and first place) among foreign brokerages in last year’s final quarter. In Taiwan, Deutsche’s share jumped from 1 percent in 2001 to more than 6 percent last year; it moved up seven places to seventh among foreign brokerages.

Deutsche’s rivals don’t dispute that the bank has made broad inroads on their turf. In South Korea, for instance, a competitor acknowledges that Deutsche now has the top sales team. “They are excellent, they are hustlers, and they have long-standing relationships,” says the broker.

Ophelia Tong, founder of Hong Kongbased hedge fund firm HT Capital Management, calls Deutsche’s sales team “more client-service-oriented than others.” Says Tong, “It shows that they hired the right people to deliver the firm’s products.”

Yet the bank’s antagonists can’t stop harping on the huge incentives that they claim Deutsche has dangled before new hires. One recent rumor, reported in the Financial Times, said Peter had laid out $50 million to lure Asia’s best traders away from other banks. He denies it. Nor can Deutsche’s detractors resist speculating about the departure of key rainmakers. “When top salespeople and analysts join a firm like Deutsche, which has a reputation for hiring and firing, and their contracts expire, they immediately want a new guarantee,” says a competitor. “Remember, Deutsche was closing offices all over Asia just a few years ago.”

Peter scoffs at this sort of talk. “The new investment we’ve made is insignificant, but the return has been enormous,” he says. “The $50 million figure is one that our competitors would like the market to believe. It is way off the mark.” Of the nearly 300 people he’s hired, only nine were offered raises to join, he insists. He adds that his own group actually squeezed 20 percent out of its costs in 2002 and an additional 10 percent so far this year.

Skeptics, however, persist in questioning whether Peter’s hard-driving sales culture is undercutting Deutsche’s equity research. Although Jing Ulrich, a top-ranked China analyst with CLSA Emerging Markets, and David Scott, a well-regarded regional strategist from Indosuez WI Carr Securities, have helped fill out its ranks, Deutsche has had a small upheaval in its research group.

Last February the bank laid off 12 analysts, including deputy research head Mohan Alexander and a number of senior researchers. Since then several senior analysts, including banking specialist Sally Ng, China expert James Lam, utilities researchers Indy Sarker and Colin Stone, Singapore specialist Hui Guan Ong and strategist Olivia Choi have all moved on.

Deutsche declined to make its Asia research chief, Richard Jones, who joined the bank from ING Barings in July 2002, available for an interview. But sources close to the firm say the initial layoffs were part of a plan designed in part to improve client servicing. Peter, who won’t discuss the analysts’ departures, says he believes that the group is making good progress. The Asia research department, he says, has actually grown by five or six people in the past year and now numbers roughly 130. Annual staff turnover, he says, is 12 percent, 2 percentage points below the industry average, and “client response to our research is the best it has been.”

Perhaps, but that hasn’t quieted backbiting competitors. “The analysts we’ve interviewed don’t think the model is sustainable,” says a research director who has hired several ex-Deutsche analysts. “There is absolute disillusionment over there with the sales-driven model that also drives the equities business.”

One former Deutsche analyst says that researchers chafe under strict daily quotas for making phone calls to clients. “That’s possible some days, but not others,” he says. Peter’s response: “We make no apology for having high standards. It’s as simple as that.”

Peter will admit that research hasn’t been his top priority: “Our approach has been to build our underlying business first. When you do that, the research rankings follow.” Deutsche ranked ninth overall in II’s 2003 All-Asia Research Team (Institutional Investor, May 2003), one notch better than its 2002 showing. Peter contends that Deutsche’s Asia-Pacific research will follow the track it did in Japan, where a big equity sales expansion preceded gains in the firm’s research ranking. Tenth in II’s 2000 Japanese poll, the Deutsche analysts rose to third place in 2003.

For now investors don’t seem displeased with Deutsche’s research. A Singapore manager renders this verdict: “Deutsche has come back onto the radar screen. They put in some very strong salesmen, and they’ve built up the research behind that. They’ve got a pretty strong team now, up there in the top tier.”

THE TOP TIER, OF COURSE, IS WHERE ASIA-PACIFIC CEO Borda and Nash and Peter want Deutsche’s whole investment banking business to be. “We’re on the right track,” says Borda. “It’s a case of patience, of determination, of keeping excellent people and of taking nothing for granted.” And, he might add, using Deutsche’s balance sheet and other resources strategically.

Still, experienced Asia watchers are reserving judgment on Deutsche’s staying power. One consultant bluntly says that the bank won’t make a go of it because it will have to spend too much on talent to compete with the likes of Goldman and Citigroup, which still have stronger global franchises. “The economics of this business is bad already,” he says, “and if you have to pay more, it doesn’t work.” HT Capital’s Tong offers a more measured view: “These big banks are very aggressive in putting teams together just to get up the league tables, and after a while they find that the P&L does not justify it, and they can often chop very fast. That is the danger.” Deutsche’s competitors would clearly like to think so, but maybe this time they’re kidding themselves.