Morning Coffee: Deutsche Bank rival pays 50% less but grows 50% faster. The super-confident 26 year old who went to Citi

The one thing that European investment banking heads take heart from is that they’re largely in the same boat.  Deutsche Bank has different issues from Credit Suisse, which has different issues from SocGen and so on, but they’re all definitely playing defense – it’s really difficult to earn a double digit return on equity if you’re outside the U.S. bulge bracket.

Or is it?  Credit Agricole can’t exactly be called a boutique, or a minor player – it’s the tenth biggest bank in the world.  But nor is it anything like a top tier (or arguably even a mid-tier) name in investment banking.  And yet its investment banking division made 12% RoE in the most recent reporting period, comparing well even to Goldman Sachs.  They have revenue growth of 22%, which is practically unheard of this year, and a growth target of 3%, compared to 2% at Deutsche Bank.  Nor is this particularly a small size effect – at €1.3bn for the third quarter, CredAg’s “Large Customers” revenue is about half of the combined Corporate Banking and Investment Banking divisions of Deutsche.  So how do they do it?

A lot of the answer seems to come from keeping costs screwed down.  Credit Agricole manages to deliver a cost/income ratio of 54% divisionally, which would be a pretty respectable number for a retail bank and is off-the-charts impressive for the investment banking industry.  It has a low average bonus per head of €272k compared to Deutsche Bank's €530k and only 23 material risk-takers who earn more than €1m.  But that isn’t the whole story – after all, you can’t deliver 22% revenue growth just by cutting bonuses.

What seems to really be the secret sauce in Credit Agricole is that it does hardly any trading business and surprisingly little ECM/DCM or classic advisory work.  Over the last decade, it’s become increasingly specialised in a small number of industries – rail, shipping and aviation – which need to find ways of financing huge and expensive but very long-lived assets.  That sort of client tends to need very tricky, very bespoke structuring advice (often with a quite a big tax component) and to be pretty price-insensitive when it comes to paying for it.  After all, bond issues and IPOs can be postponed and shopped around the Street, but a ship, plane or piece of infrastructure often has a pretty tight construction and delivery schedule, to which bad things can happen if the financing isn’t in place.

Of course, although this is a big niche, it’s a niche – the whole of European investment banking couldn’t reinvent itself along the lines of Credit Agricole, and there’s probably only quite limited scope for taking market share from the incumbent.  But maybe it does go to show that not all hope is lost.  Credit Agricole got to where it is now by understanding the winner-takes-all nature of the markets game, and asking itself what services clients might actually need, rather than trying to push harder at the things it was already doing.  A bit more of that might be a good idea.

Elsewhere, lots of successful people seem to have an origin story where they did something outrageous at an early age and got a reputation for being gutsy.  For example, Jane Fraser went into McKinsey as a new 26-year-old candidate recruit and said she’d only accept the job if she could report directly to the head of banking.  Of course, we never hear stories from people who did that and got told to take a walk, but twenty-six years later, Ms Fraser has been promoted to President of Citigroup and is in pole position for the next CEO.

Her path to career success as described in the FT profile is not atypical for a high-flying McKinseyite.  There are the stories of superhuman work ethic and organisational skills.  There’s hokey-but-effective motivational leadership moves like showing up to town hall meetings in a local baseball jersey.  There’s a bit of a trail of (admittedly anonymous and somewhat jealous-sounding) remarks about having tended toward head-office and strategic roles rather than getting a lot of operational experience.  And there’s precisely one funny story about the time she hid a colleague’s cowboy boots and he had to go home barefoot.  Since Citi’s current problem-child is the consumer bank rather than Pablo Ybarra’s investment banking operation, most of her focus as President is likely to be on that, but in the meantime, senior Citibankers would be advised to watch their shoes.

Meanwhile …

We noticed the “shoeless office” trend, last week and thought it would be a tech industry fad, which would only ever appear in banking if someone was playing a joke like Jane Fraser’s.  But no; Rajeev Misra of Softbank Vision Fund “favors dark designer sport coats with pocket squares and bare feet or furry Gucci slippers” in the office when hunting for unicorns.  No indication whether this is a habit he brought over from Deutsche Bank, or whether the other Deutsche veterans at Softbank are similarly shod.  This is not necessary the only odd thing going on; there is also an investment partner who owns a 20,000 bottle wine cellar but doesn’t drink. (Bloomberg)

A tax cloud on the horizon – Rennaissance Technologies has written to current and former employees, advising them to put some money aside, because the IRS wants to deem the “perk” of being able to invest in Medallion Fund without paying fees as a benefit and claw back unpaid tax on it.  This might affect quite a few other high-performing hedge funds. (WSJ)

Where do you go when your reputation back home is in the dumps?  Neil Woodford is in China, having exploratory meetings about raising a new fund. (Bloomberg)

You might not think of it as a financial centre, but Houston is the place for anyone who’s anyone in oil and gas investment banking.  Stetson hats, boots and talking about “th’ile bidness” are optional, but as is often the case in a specialised sector, it’s a small community and the key players are in and out of each others’ business more than in New York. (Houston Chronicle)

Analysts at Nordea have trained a machine learning “robot” to predict Swedish central bank rate rises, and now they’re in the nightmare situation – it disagrees with them. (Bloomberg)

Cryptocurrency isn’t lighting up the trading floors like it used to, but the stories are no less crazy; currently, disgruntled customers of bankrupt exchange Quadriga want to have its founder exhumed because they think he faked his death. (WIRED)

Photo by Clem Onojeghuo on Unsplash

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