Strengthening
Investment Banking
4
info exchange
WHAT'S NewS Issue 10 November 1997
Of all the organizational changes that have been engineered in
recent months, none has provoked more attention than the
strategie commitment to strengthen our investment banking arm.
What's News meets the architect of this shift to explore the
rationale and organizational implications.
'Rabobank International is a very small
player in the world of investment banking,
regardless of how you choose to measure
it: whether by allocated capital, staff
levels, global reach or the extent of our
customer base,' notes Alex von Ungern-
Sternberg, who has been chosen to
spearhead the investment banking thrust.
'Our key challenges at this moment are to
be ready for the consequences of the Euro
and to grasp market opportunities within
a competitive field that is marked by rapid
consolidation.'
CLEAR MOTIVES
The motive is clear enough. For years, our
branch network was premised on a lending
business where margins are increasingly
pressured. We have successfully
compensated, to a degree, by expanding
our competency in money markets, NLG
bonds, and more recently Dutch equity and
equity derivatives. But these operations
have yet to achieve true world class
commensurate with a AAA bank. In too
many areas, we lack customer focus.
Hence, the far-reaching decision to
considerably expand our investment
banking capability; this in turn, implies
setting clearly-defined priorities about the
markets and products in which we wish to
compete. We cannot be all things to all
people. 'The key is to attain critical mass in
a broader but very carefully delineated
spectrum of products and services that our
customers, especially in the core groups,
already want or can be expected to demand
in the future,' says von Ungern-Sternberg.
This involves aligning the strategy of our
investment banking activities with other
parts of Rabobank International: an
integrated approach within the parameters
set by the Customer Focus Strategy
approved in 1996, which singled out the
following customer groups: food and agri,
health care, Dutch corporates operating
internationally, international corporates,
financial institutions, international high
networth individuals and the Rabobank
organization.
Alex von Ungern-
Sternberg, a force
behind our
investment banking
thrust.
SUBSTANTIAL INVESTMENTS
Capital allocated to investment banking
will rise from some NLG 2 billion at
present to some NLG 2.8 billion by 1999
with most of the increase relating to
customer/counterparty credit risk.
Substantial expansion is budgeted for
equity as well as interest rate products.
Staff will grow by some 380 front office
professionals plus related infrastructure
support. This plan was originally leaked to
London's Daily Telegraph newspaper which
mistakenly asserted that all of these hires
would be based in the UK. In point of fact,
only a third will be based in London, which
gives us for the first time systematic access
to the international institutional investor
base. The rest of new hires will be dispersed
throughout the network including Utrecht,
Amsterdam and New York. Even then we
will still be a modest player in the
investment banking industry. Return on
solvency is expected to swell to some 20
percent (pre-tax) while the profit generated
by investment banking, as a proportion of
Rabobank International total, is budgeted
to reach 40 percent by the year 2000 (it
now stands at 25 percent).
CONCRETE PLANS
But what do these broad plans mean in
concrete terms? An essential objective in the
Investment Banking strategy is to move from
being an investor - primarily in yield curve
risk (and in some counterparty deals) to
becoming a more effective intermediary for
customer deals. We must buy and sell.
Investment Banking will become a more
significant user of credit risk than was the
case in the past. This means more actively
cultivating our relationships both with
corporates and with large non-bank
financial institutions. For example, we will
have to develop relationships with the larger
multinational names while at the same time
continue the current mid market
relationships. The deal flow from the F&A
and Health Care sectors alone will not be
sufficiënt. Multinationals from other sectors
will be covered to create sufficiënt deal flow
and create an adequate return on solvency -
success will in turn give us credibility in the
F&A and Health Care sectors. 'The single
most important source of volume are the
pension funds, insurance companies, mutual
funds and indeed some hedge funds, that are
both short-term traders and huge long-term
investors,' remarks von Ungern-Sternberg.
'We cannot pretend to know what's going
on in the world, trade well, and therefore
service our customers with tight prices and
good structures unless we can tap into the
business volumes that are constantly
generated by this core customer group
within the financial community. Our aim is
to build an investment banking activity on
customer franchises and product excellence.'
COMPETITIVE REPUTATION
Turning to products, in equities the goal i
to become the 'banque de réference' in the
focus sectors of F&A and Health Care. 'By
cultivating the fields in which we already
enjoy a competitive reputation, we can
