LONDON - Never did the adage "necessity is the mother of invention" apply more aptly than to NationsBank's London operation.
Just as the $171 billion-asset, Charlotte, N.C.-based superregional has risen to stardom and clout in the world of banking, its London activities have been mushrooming.
It's not clear how big NationsBank London will be allowed to grow. Executive vice president J.G. Richards Roddey insisted in a recent interview that the London office exists to serve the folks back home.
From a handful of employees at the old North Carolina National Bank branch of the 1970s, NationsBank now has more than 500 employees in London.
True, some of the increase came from absorbing the staffs of institutions that NationsBank acquired, like C&S/Sovran and Chicago Research and Trading, a derivatives unit.
But most of it came from the superregional's own efforts to build up its firepower in areas like institutional equities brokerage, derivatives, foreign exchange, and wholesale banking. These are services required by the companies NationsBank sees as its market.
"Customers are demanding overseas services, and they don't have that much," said Thomas Hanley, managing director at CS First Boston, referring to NationsBank.
"The feeling on their part is that international operations and their ability to facilitate international trade is going to become increasingly important," said Nancy Bush, a banking analyst at Brown Brothers Harriman & Co. "Like it or not, it's part of their evolving identity of what will eventually be a national entity."
Late last year, NationsBank set up a joint institutional fund management venture, Nations Gartmore Investment Management, with Gartmore, the British fund manager.
NationsBank acquired 10% of Gartmore and an option on an additional 15%, then merged its own international management unit, NationsBank Panmure Investment Management Ltd., into the new company. NationsBank will bring in customers looking for foreign investments, and Gartmore will supply the investments.
"The idea is to give our clients access to top international management," said Mr. Roddey. "They have international expertise," he said of Gartmore. "We have the ability to raise funds."
Hedging its risks, however, NationsBank has reserved the right to pull out of the deal if the joint venture's fund doesn't reach $5 billion in five years. But with assets under management already up to more than $1 billion, Mr. Roddey said, he doesn't think "it's going to be any sweat" to reach $5 billion.
International asset management is only part of the picture.
The rest revolves around old time relationship banking, loan syndications, foreign exchange, derivatives trading, equity underwriting, and mergers and acquisitions.
From January 1992 to the end of September 1994, Panmure Gordon, the bank's stockbroker, floated 29 issues on the London Stock Exchange, or more than any other brokerage unit except James Capel.
"These products are a natural outgrowth of the changing needs of NationsBank's customers and reflect the changing needs of a banking company," said Thomas Theurkauf, banking analyst at Keefe, Bruyette & Woods Inc. "Capital markets, trading, foreign exchange, derivatives, and equity funding (are) what any corporate bank needs to compete in this day and age."
Panmure Gordon & Co., which caters to institutional investors, helps raise equity for British and U.S. companies in both Britain and the United States. It also acts as financial adviser to British companies that are clients of NationsBank in the United States.
"Our forte is finding mostly small to medium-sized companies with good growth prospects, particularly those with U.S. operations," Mr. Roddey said.
He also said that Panmure Gordon, acquired in 1987, is "the only successful acquisition of a London broker by a U.S. bank."
Other U.S. bank companies, such as Security Pacific Corp. and Citicorp, paid handsomely for British merchant banks after U.K. regulators allowed commercial banks to take over brokerage firms in 1986. Most of those firms, however, were subsequently broken up, disbanded, or spun off after increased competition in the bond and equity markets prevented them from earning anything near enough to justify their cost.
NationsBank's expansion in London is closely linked to efforts to transform itself from what was essentially a retail and middle-market bank into a force in wholesale corporate banking and global capital markets.
"London is the financial center for Europe, and any bank of any size needs access to this market to serve its corporate clientele," Mr. Roddey said.
In addition to the buildup in London, NationsBank obtained Federal Reserve approval for an investment banking unit, NationsBank Capital Markets Inc., to underwrite equity.
But the London operation is already several steps ahead of the capital markets buildup in the United States, if only because NationsBank was able to get started here earlier. In fact, London looks much like a prototype for what NationsBank is seeking to build back home.
"You have more powers to do things in Europe and always have," said Mr. Roddey. "If we could have bought a U.S. stockbroker in 1987, we would have. But we couldn't."
Still, some analysts describe the bank's expansion in Europe as "ultra- cautious." Critics claim the strategy illustrates NationsBank's inability to decide whether it wants to remain a regional, middle-market bank or to move into the world of large corporate banking.
"They're looking for something that hooks into their middle-market strategy," according to Brown Brothers' Ms. Bush. "They're not looking to serve General Motors, and I'm not sure large wholesale customers look to NationsBank as their international tie either."
The bank's inability to look beyond the middle market even as it continues to expand in the United States, she said, adds to uncertainty among investors about just what sort of company NationsBank is.
"The moves they're making put them into a quasi money-center status but leave them neither a purely regional nor a money-center bank," Ms. Bush said.
The result is that the company is "fairly dramatically undervalued compared to (its) peers," which is reflected in its share price, she said.
NationsBank is trading at about 7.9 times this year's earnings and is expected to trade at about 7.1 times next year's earnings, according to Brown Brothers Harriman. That compares with a regional bank average of about 8.6 times earnings.
Just how fast NationsBank is prepared to expand in Europe remains an open question. Judging from what its executives and outside analysts say, any further growth will be one step at a time.
"They'll do what they need to do to support their customer base, and if the customer flow begins to pick up, they may put more investments there," said Henry Dickson, a banking analyst at Smith Barney.
"We've expanded pretty rapidly, but we're not here to take risks," Mr. Roddey said. "Rents are high, staff costs are high, and you have to have a good rationale for being here because it's not cheap."
