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Mind the Gap

The gap between the top 10 banks and their peers is widening. But so too is the gap between the top five and the rest of the pack. Julie Ros looks at the results of the top 35 forex banks to find out where the profits and losses are being made.

As we move towards mid-year 2001, a look at the year 2000 results for the top 35 reporting banks shows a healthy foreign exchange market – but one that is clearly consolidating among the top providers. In 2000, the top five banks accounted for an estimated 66% of the top 10 banks’ total annual revenues, up from 64% in 1999.

The top 35 reporting banks together earned an estimated total of $13.37 billion from FX and related trading income during 2000 (see table, page 17). This represents a 13% improvement over the previous year’s total of $11.81 billion. Overall, the majority of banks reporting revenues in our table turned in better results during 2000 than in 1999, but what is particularly interesting is the fact that the top five banks look to hold as much as 42% of the total $13.37 billion earned during 2000 (up from 41% in 1999), while the top 10 together hold 63%, off slightly from 64% the previous year. It should be noted that these numbers may be influenced by bank mergers, particularly those of JP Morgan/Chase and Royal Bank of Scotland/NatWest, whose year-end results were combined and reported together by the respective institutions.

The top 10 banks together earned an estimated total of $8.479 billion from FX during 2000, an 11% improvement over the total $7.616 billion earned by this group in 1999. Within this top 10 group, the top five banks garnered 66% of these revenues, totalling $5.569 billion, a 2% improvement over the $4.889 billion this group would have held in 1999. The top five increased total results by nearly 14% year on year, while the top 10 improved by 11%.




There is also a noticeable gap between the revenues of the top five and their nearest peers – with a $276 million gap between UBS Warburg in fifth position and Credit Suisse First Boston in sixth position. But perhaps more interesting is the fact that the banks ranked from 6-10 earned an estimated total of $2.910 billion in 2000, nearly the same as the total for the banks ranked 11-20, which together earned $2.915 billion. After this, the 15 banks that comprise the 21-35 group together earned $1.974 billion. In terms of overall results, the gap has widened between the top 10 and the 11-20 group’s total revenues. The gap between these groups stands at $5.564 billion, while in 1999, the gap between these banks was $5.226. The gap between the 11-20 and 21-35 group is even wider, with $941 million standing between the two group’s total results in 2000 and $586 million in 1999.

The results tables that follow reflect the best possible comparison of FX trading revenues that we could make, based on reported results in banks’ year-end financial statements; however, in many cases we are comparing apples with oranges, as reported results differ by institution and by country. For example, Deutsche Bank broke out its FX trading revenues, while several of it’s German and Swiss counterparts included income from bank note and precious metals trading. Bank mergers, such as in the case of JP Morgan/Chase Manhattan and Royal Bank of Scotland/NatWest, are also difficult to gauge, as they simply reflect the outright combination of each banks’ results. To make matters even more complicated, the combined RBS/NatWest reported 2000 results covering a 15-month period.

A number of banks also operate on different financial years, such as Commonwealth Bank of Australia, which has its year end on 30 June, while the other three reporting Australian banks end their year on 30 September. Meanwhile, the Canadian banks operate on a year ending 31 October.

Furthermore, some banks such as Citi and RBC include revenues from both wholesale and retail FX operations.

Additionally, it should be noted that these results only include those banks which publicly report annual results, so many banks could not be included in the tables, such as the French, Japanese, Spanish and Italian banks. The investment banks, such as Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley, do not publicly release FX results.

It should also be noted that the UK banks were adversely affected by exchange rates when converting into dollars – so where a bank may have enjoyed an increase in year 2000 results over 1999 in sterling terms, once converted into US dollars, results may show lower year on year performance. Therefore, we have also included charts that show bank results in their domestic currencies or euros. HSBC reported its annual results in US dollars, which is why it is included with the US banks in the US dollar table.


The outright combination of Chase Manhattan Bank and JP Morgan on 31 December 2000 led to the merged bank coming in at the top of the year 2000 FX trading revenue rankings with a $1.465 billion result.

Since the merger occurred on the last day of 2000, the reported results reflect the combination of both banks’ revenues – and the 1999 results have been combined and restated for comparison purposes. Although the outright combination of numbers may be a one-off, the combined banks showed a 22% annual increase in FX revenues.

Robert Standing, managing director and head of FX & Rates for JP Morgan in London, showed surprise at having come in ahead of Citibank, but feels confident that this result can be repeated. “We are seeing a continued increase in marketshare and volumes, so our business profile is strong and we are on course to maintain that this year,” he says.

“JP Morgan has a clear mandate as a global wholesale investment bank. In this we are unique, because we are a wholesale financial firm across the entire investment banking spectrum – whereas many of our competitors have gaps in terms of product or geographic coverage,” says Standing. “We have the capability and commitment to provide a one-stop financial services shop for clients.”

The merger between JP Morgan and Chase formed a bank that reflects the strengths of both institutions. Standing and his colleague in the US, David Puth, oversee FX for their respective regions, reporting to co-heads of the Credit & Rates division, Bill Winters and Don Wilson, who jointly run the business. Winters focuses on credit while Wilson oversees the rates product set.

“FX and derivatives is a global group in terms of consistency and delivery to clients, but we have a regional management structure in place. Because we are a client facing organisation, we develop financial solutions across the entire product offering,” says Standing.

Looking to Q1 of this year, the standings have already flipped, with Citi reporting a 15% year on year gain to $391 million and JP Morgan reporting a 27% decline to $249 million in Q1 versus Q1 2000.

“The fact that our 2000 FX results were moderately lower than 1999 says more about a strong 1999 than a weak 2000,” says Richard Moore, global head of FX at Citibank.”As Q1 2001 demonstrates, over the longer term our financial performance remains robust.”

Simon Jagot, global head of FX at UBS Warburg, adds,”Our 30% improvement is due to better across the board performance. This is due in part to better market conditions, but also to a combination of better performance from various client and geographic segments.”

This year is also looking strong for Deutsche Bank, which posted a record first quarter with ?408 million from FX and precious metals trading (?377 million in FX alone), versus ?230 million during Q100.


Mergers and acquisitions (M&A) activity was cited among several of the top providers as a strong driver behind FX flows during 2000, a trend that is continuing this year. “One benefit of the merger is that we are seeing an increasing share of M&A activity,” notes Standing.

At Deutsche, the year 2000 was a record, with growth running at 30% compounded for the fourth consecutive year, points out Hal Herron, global head of FX. Much of the growth was led by what Herron calls the bank’s status as the “euro bank of choice”, which he says attracted substantial M&A flows.

“The increase in pension fund flows and international trading is leading to more FX transactions generally,” says Herron. “Those banks that see the big M&A flows and are prepared to take risks and provide superb flow information to clients are the ones that are going to have a clear advantage. Therefore I believe the top five banks will increasingly distance themselves from the pack.”

Deutsche is also positioning itself as a total FX solutions provider, says Herron. Revenues were fairly evenly split between spot, forward and option activities. “Five years ago, options only contributed about 2% to our total FX revenues, but now they account for about one-third. So not only has the total size of our revenues grown, but also the percentage of composition,” he says. “We made a very focused effort to build a diversified business and product range.”

More clients are also looking at FX structuring and currency overlay, as well as opportunities to reduce their cost of debt, and pressure on cash flow and funding levels, adds Standing.

As for the emerging markets, the explosive growth prior to the 1997/98 crisis is not being repeated – with levels in the double digits versus 100% growth, Standing says, adding that the business today is being led by underlying business activities versus the speculative interest seen leading up to 1997.

Herron adds that the more industrialised emerging markets continue to generate substantial client flows, but it is difficult to foresee speculative trading regaining a foothold in the near future.


E-commerce has yet to feed through to the bottom line, agree a number of senior managers. “We are seeing big growth in tickets, although this still amounts to a fairly low percentage of our overall FX business,” says Standing.

He adds that client uptake is somewhat regionalised, with US and Scandinavian clients leading the way, followed by Germany and other parts of Europe. Certain client segments are also moving online faster than others, depending on the platform. “The single-dealer platforms are still stronger with smaller and mid-tier clients, but the larger wholesale clients are beginning to look at the multi-contributor portals,” he says.

Standing believes e-commerce is more about a steady migration, rather than a ‘big bang’. “Clients are looking at how e-commerce will make them more productive – and at how it changes business and workflow processes,” he says. “We are seeing a steady uptake in customers moving onto e-commerce platforms, but what is interesting is once they move, it tends to be one way – they immediately begin operating in a new manner.”

Herron agrees that e-commerce is not yet translating into revenues. He points to the bond market as an example. “Deutsche is now doing 70% of its bond trading over electronic systems, but I think FX will take a bit longer because the bond market is primarily an institutional market, whilst FX also has a large corporate market participation,” he says.

“We are probably doing about 5% of our FX transactions over the Net, but I believe the online FX portals will change this fairly quickly as smaller deals migrate to these services – although the larger deals will take some time to move onto the Web,” he adds.

Profit & Loss

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