Germany's Dresdner Bank, long viewed as a stodgy player in the U.S. market, has begun shaking things up a bit.
The bank, Germany's second-largest with $306 billion in total assets, is moving to diversify its U.S. operations, shifting away from capital- intensive lending in favor of more profitable activities such as securities trading and asset management.
For example, Dresdner last December agreed to acquire RCM Capital Management, a San Francisco-based asset management company. If the deal is approved by regulators, the German bank will add $26 billion in assets to the $150 billion it currently manages worldwide.
"We have a strong desire to alter the revenue mix," said George Fugelsang, a U.S. native who is chief executive and head of the bank's North American operations. "Core lending alone no longer satisfied our needs for adequate returns."
The shift in strategy marks a major change for Dresdner and comes at a time when other leading European and Canadian banks are also making moves to focus on nonlending businesses. But Dresdner is taking a far more aggressive and focused approach than many of its competitors as it seeks to leverage its existing relationships with large European companies to build a platform for additional business.
Last year, Dresdner, which also owns Oechsle International Advisors LP, a midsize Boston company specializing in foreign investment for U.S. clients, significantly expanded its international asset management operations with the purchase of Kleinwort Benson, the London-based merchant bank.
Then came the RCM acquisition. Mr. Fugelsang said the San Francisco- based asset manager is critical to Dresdner's global asset management strategy. "We had a major presence in asset management, but we lacked a sizable U.S. activity," he said.
The latest acquisitions are part of a series of initiatives started when Dresdner put all North American operations under a single management in 1994. The bank subsequently took complete control of its investment banking unit, ABD Securities Inc., by buying out the 25% share held by another German bank, Bayerische Hypotheken und Wechsel Bank.
Last year, Dresdner pumped $200 million of extra capital into ABD. The unit, since renamed Dresdner Securities (USA) Inc., has become the centerpiece for a major buildup in capital markets operations, including trading, corporate finance, and mergers and acquisitions advisory.
Profits from trading fixed-income securities, a major area for Dresdner, will climb to $50 million this year from $15 million in 1995, Mr. Fugelsang predicted.
Meanwhile, Dresdner's commercial banking branches in New York, Chicago, and Los Angeles are concentrating on treasury-related operations like cash management, foreign exchange trading, risk management, derivatives, and more complex, specialized transactions for companies smaller than those listed in the Fortune 500.
Foreign banks can keep existing investment banking units under the U.S. International Banking Act of 1978, but cannot make acquisitions.
Last year, Dresdner, in a move to stay within U.S. law following the acquisition of Kleinwort Benson, which also had U.S. operations, applied to U.S. banking authorities to convert its investment banking company into a Section 20 subsidiary.
Deutsche Bank, Dresdner's biggest competitor, similarly converted its U.S. investment bank into a Section 20 unit after acquiring London-based Morgan Grenfell in 1994.
Dresdner has ambitious plans for its capital markets activities. By the end of this year, the bank will boost U.S. staff to nearly 1,200 from less than 600 in 1994. Although a large part of the increase will come from taking on the 250 employees of RCM, staff in other activities, such as strategic advisory, also are being increased.
By the end of 1996, Mr.Fugelsang said loan-related revenues in North America will shrink to less than 40% of total revenues from 60% three years ago and 50% at the end of 1995, while trading and fee-related revenues will rise to 60%. The bank had total revenues of $200 million in North America last year and net profits before taxes of $50 million.
He admitted there's more to it than just pumping in extra capital and hiring people. "It means a shift in thinking to strategic problem solving rather than just money lending," he said.
Dresdner's determination to refocus its efforts in the U.S was clearly reflected two years ago, when the bank made Mr. Fugelsang head of the $12 billion-asset U.S. operation.
Born in San Francisco, the 55-year-old banker speaks fluent Spanish and passable German besides his native English. In the eight years prior to joining Dresdner in February 1994, he was a managing director in Morgan Stanley & Co.'s London-based investment banking division, principally responsible for merger and acquisitions for European banks and insurance companies.
Prior to that, he spent 22 years at Citicorp, serving as division executive and chairman of Citicorp Information Resource Inc., and as division executive and senior vice president in Frankfurt responsible for Citibank's institutional banking activities in central, southern and eastern Europe.
Dresdner bank isn't the only institution expanding its U.S. investment banking operations. Major U.S. and foreign banks are pursuing a similar strategy and analysts said Dresdner has an uphill battle ahead.
Bryan Crossley, a bank analyst in London with ABN Amro Hoare Govett, pointed out that Dresdner is only one of several foreign banks building up their capital markets operations in the United States, "but success hasn't been too great so far.
"You could probably come up with a large double-digit number of foreign banks which have expressed a willingness to develop an investment banking business, placed money where their mouths were, and not got anything back for it," he said.
He added that foreign banks face three obstacles: lack of distribution, a regulatory framework that limits expansion, and wide cultural differences from the U.S. market.
"Even if the commercial argument in favor of developing investment banking services is quite compelling, it's difficult for foreign banks to make headway in the current U.S. climate," Mr. Crossley said.
"The United States has been a deuce of a problem for foreign banks," said John Leonard, a banking analyst with Salomon Brothers in London.
Mr. Leonard, however, said he saw little to criticize in Dresdner's strategy, noting that the bank is building off its strengths in European capital markets and asset management.
Mr. Fugelsang acknowledged that with many large U.S. and foreign banks pursuing a similar strategy, the playing field is starting to get a little crowded.
But he emphasized that Dresdner has got several advantages operating in its favor including its strong balance sheet and credit rating and its Kleinwort Benson subsidiary.
"There aren't a lot of investment banks around with the size, scope and muscle of Dresdner," he observed.
While Dresdner is straying far from its commercial banking roots, Ms. Fugelsang argues that it has little choice.
Competing for corporate customers on a global scale means being able to offer a broad range of banking services, including those Dresdner is now building up.
"Our core base is Europe, but we definitely intend to be a global player because we have to be," he added.