Like U.S. banks, foreign banks in the United States find themselves confronted with a constantly shifting market environment.
For many, simple lending is no longer enough to bring in adequate profits. They are looking for more lucrative activities. Others, who came to the Untied States with a more specialized approach, are similarly reviewing their options.
In a roundtable interview this month, several senior foreign bankers reviewed some of the major market trends.
The bankers were Jean-Claude Gruffat, executive vice president of France's Banque Indosuez; Fabio Fernandez, general manager in New York for Venezuelas Banco Mercantil, Jens Westrick, executive vice, president for Germany's Norddeutsche Landesbank; and Patrick Sabino, assistant general manager for Mexico's Banco Nacional de Mexico.
Also participating was Lawrence Uhlick, executive director and general counsel for the Institute of International Bankers.
Q.: Are foreign banks changing their business focus in the United States?
GRUFFAT: The focus is changing.
Most foreign banks started out here in areas such as lending and trading that are closely linked to business with companies in their home country. But today, foreign banks focus on the same business U.S. banks are doing.
Just as we've seen U.S. banks going from booking assets to originating and selling loans, foreign banks are becoming effective at generating and selling assets.
Foreign banks have also become more aggressive competing in the market with U.S. banks, in many instances because business is slow in their home markets. At the same time, just like U.S. banks, they've also become more selective in providing credit, less willing to simply try to build market share.
WESTRICK: Indeed. Profitability has become the key as foreign banks have matured in this market and are expanding their businesses by competing head to head with their U.S. counterparts.
Foreign banks have selected certain distinctive market segments, which they serve with a specific product mix based on expertise in their home markets.
FERNANDEZ: By and large, Latin banks are involved in lending to their home countries. And by and and large, they don't compete with U.S. banks for this business.
But we have seen a lot of European banks competing with us for Latin business, such as trade finance, out of New York. U.S. banks mainly focus on capital markets-related activities, such as American depositary receipts. Only a few Latin banks are capable of handling such business.
Q.: Many foreign banks have applied for section 20 underwriting powers, while others are expanding securities-related activities through their grandfathered investment banking units. Is there a trend among foreign banks to develop investment banking in the United States?
GRUFFAT: On the corporate side, foreign banks have generally not been successful at investment banking. The success of a foreign bank often depends on its ability to distribute in the U.S. products developed abroad.
WESTRICK: I don't think foreign banks will be able to effectively compete here with the U.S. investment banking houses, who have a large client base and a sophisticated product mix.
What the large foreign banks will do, however - and I believe successfully so - is market their home-country investment banking skills to the large U.S. corporations, to fend off U.S. competitors in their home markets.
PATRICK SABINO: The Mexican banks are seeking to expand their distribution and investment banking activities outside the home country. The primary focus is on Euro-issues.
Current U.S. regulatory restrictions impose limits on this activity in the United to States.
FERNANDEZ: We have limited equity, so there is a limit to the kind of investment banking we can do, But we do have 13,000 individual accounts, and the strength we bring to the market is in our distribution capabilities. Big U.S. and European banks need to do the $ 1 00 million-plus deals, but there is a market for deals of less than $50 million we can handle.
GRUFFAT: The main idea behind Glass-Steagall was to prevent mixing retail deposit taking and riskier activity. We don't take retail deposits.
Also keep in mind that we are lending $100 billion more annually to this market than we raise in funding on this market.
WESTRICK: I would argue that no foreign bank can compete in the American market because they don't have to know-how.
Assume foreign bank A buys Salomon. It buys manpower and a client base. But 30% of the manpower might not wish to continue, while 25% of clients might not want to work with foreign bank A. So there's no real purpose buying something substantial or meaningful.
GRUFFAT: European banks also have a philosophical problem paying someone more than their chairman makes at home.
Q.: What are profits like these days for foreign banks?
GRUFFAT: We've made more money these last three years then we've ever made before, mainly as a function of being more focused on trading.
FERNANDEZ: A few years ago we could make easier money lending to Latin America, but margins have been shrinking. On the other hand, volume has increased. You can do business, provided you can live with those margins.
WESTRICK: Foreign banks and U.S. banks have been quite profitable over the last three years. Foreign banks increased their market share in commercial and industrial loans and derived even more profit from their trading activities.
However, with the yield curve flattening and the American banks being back in force as lenders, it will be more difficult for foreign banks in 1994 to do an encore of '93.
Q.: How are foreign banks reorganizing the operations to keep pace with market trends?
WESTRICK: Foreign banks are reassessing their strategies and reducing their cost structure very much like their U.S. brethren.
Many regional offices - in Atlanta, Houston, and elsewhere - have been closed, while new avenues are being explored and implemented, like securities transactions and special finance areas such as project financing or lending to municipalities.
We must bear in mind that foreign banks haves gained a market share of around 30% in the U.S. banking market.
Q.: How important is the U.S. market to your banks?
GRUFFAT: We are a French bank that is more international than French. More than 50% of our business is outside our home market, and 14% of our business is in the U.S.
Another reason why the U.S. market is important to us is innovation in financial instruments. One of the big benefits of being here is learning about such innovation. For us, that includes financial futures, interest and currency swaps, interest and currency options.
FERNANDEZ: The U.S. market is not substantially important to us businesswise, since we do not lend in the United States. But it is important for gaining expertise we can apply to the Latin market.
One of the main reasons for being in the United States is to to learning about trends in regulation and new products, such as trade asset securitization.
For instance, we were extremely interested in tracking regulatory developments in payment systems and capital requirements.
What we learned is now very useful, since Venezuela is opening its markets and we would be competing bared on international standards.
SABINO: On the asset side, the U.S. market isn't a priority for us. On liquidity side, it's very important, and dollar funding we get here is critical to our bank's ability to operate.
This is also where trends such as structured finance take place that are very important for Mexico's emerging markets.
Financial engineering is developed here, and this engineering is transportable.
WESTRICK: The U.S. market is important for most banks of a certain size. Even if a foreign bank is not active in this market in serving its domestic clients, the largest and most innovative financial market in the world and cannot be ignored. Furthermore, opportunities to issue securities substantially enhance a foreign bank's funding base.
Q.: Do U.S. banking regulations prevent you banks from developing more business?
GRUFFAT: Keep in mind that we are good corporate citizens. But there is a feeling that things will get worse in terms of regulation.
Every foreign bank exam takes one or two months. That means one-sixth of our working time is now devoted to making sure we comply with regulations.
WESTRICK: Many U.S. regulations were issued against the BCCI and BNL background. The pendulum of regulations and supervision has swung quite far.
This could be counterproductive in the long run. With today's communication possibilities, certain activities, particularly in the derivatives area, could easily be handled from offshore locations.
