When it's time to raise money, CFOs find it hard to ignore the muscle that global banks bring to the task. Last year, they made U.S.-based Citigroup the largest underwriter of corporate debt not just in its home country, but around the world. In Europe, they tapped U.S.-based investment bank Morgan Stanley more often than any European institution to underwrite equity and equity-related offerings across the continent.
"Global banks are powerhouses in raising capital," says Phoebe Wood, executive vice president and CFO for $2.3 billion Brown-Forman Corp., which markets wines and spirits in more than 130 countries. Earlier this year, Louisville, Kentucky-based Brown-Forman was part of an investor group contemplating the acquisition of U.K.-based wine and spirits company Allied Domecq PLC. While the group ultimately decided against the deal, Wood credits global banks — in this case, Bank of America and Citigroup — with making it possible to consider the bid by agreeing to commit a large amount of capital in a very short period of time. Those two banks backed the whole credit facility for purposes of the bid and would have syndicated the deal had it been successful.
Bob Druskin, president and CEO of Citigroup's global corporate and investment banking group, says that after more than a decade of talk, global banking is finally a reality. "Products and services move freely around the world, money moves freely, trader barriers are coming down," Druskin says. "All the talk about globality 10 years ago has come to fruition." Tim Arnoult, president of global treasury services at Bank of America, is similarly sanguine. "Global banking is more than a marketing pitch," he says. "It is something we execute on every day."
Well, sure — in some arenas. But even as Arnoult credits Bank of America with being able to meet the cash-management, investment-banking, credit, and capital-raising needs of its multinational customers around the globe, he also confirms that the bank's global resources are really focused on four parts of the world: North America, Europe, Asia, and Latin America. Elsewhere, he says, the bank relies on partnerships with nonaffiliated local banks to provide a "seamless" solution for its clients. To one degree or another, so do all global banks. But not every corporate finance executive is keen on that strategy, even in countries where restrictive local banking regulations make it necessary.
"It makes us a little queasy, because we're not dealing just with the bank we have a relationship with, but with their partner as well," says Gary Barth, assistant treasurer at $36.6 billion global delivery giant United Parcel Service Inc. (UPS) in Atlanta. "We prefer to do business with banks that have their own bricks and mortar. I know I have leverage over my bank. I don't always have it over their partner."
David Blair, treasurer for the Asian operations of $39.6 billion Finnish cell phone manufacturer Nokia Corp., agrees. "When things start to go wrong, who's really holding the baby?" he says. "Technically, the systems work. I'm not worried about that. It's when we send a payment close to the cutoff time that somehow just doesn't get executed. Who's going to take the rap? A lot of the time, we end up with the problem."
More surprising to some treasurers is that even when banks have a physical presence in some far-flung location, customers don't always get access to the same services and systems available in their own backyard. John Weisenseel, senior vice president and treasurer at $5.3 billion McGraw-Hill Cos. in New York, uses three global banks for the majority of its cash-management needs: Citigroup in Latin America, U.S.-based JPMorgan Chase & Co. in Asia, and Germany's Deutsche Bank in Europe and the United States. In general, he applauds their service. Still, Weisenseel says, "the cash-management platforms offered by these banks are meant to be global, meaning you are able to take them and use them anywhere in the world. But we've found that with some of them, you can't. For example, when you look at Deutsche Bank, they're using three cash-management platforms — one for Spain, one for the rest of Europe, and one for the United States. They're all different and require different log-ons, different passwords, and different smart cards. It makes things a little more complicated than what you would expect. That has been a disappointment."
In addition to requiring treasury staff to be trained on different platforms, Weisenseel says the multiple platforms create other burdens for McGraw-Hill's IT staff. "The more modules you're using, the more apt you are to have a hiccup," he says.
Deutsche Bank isn't the only bank that sometimes induces hiccups at McGraw-Hill. The publisher's employees use corporate credit cards issued by Citigroup. In Mexico, Citigroup has chosen to issue some of those cards through Grupo Financiero Banamex, a locally popular financial services firm it acquired in 2001. Weisenseel says some McGraw-Hill employees have had their Banamex cards declined during whirlwind, multicountry travel days across Latin America after the bank's antifraud systems calculated that nobody could be making charges in three countries in one day.
Weisenseel is hardly the first treasurer to be jolted by the potholes in the global banking superhighway. About five years ago, UPS's Barth approached the world's biggest banks for help pooling UPS's offshore cash balances at one location. "We were looking to take funds sitting idle and create one pot of money where we could earn a better rate of interest, minimally, or even better, reinvest in our business with our own money rather than borrowing onshore," Barth says. "The usual cast of characters said they could do this for us, and the reality was they couldn't." Much to his surprise, UPS then found a small Dutch bank — BMG Bank Mendes Gans — that specializes in setting up such arrangements and was able to do the job. Now, Barth says, UPS is able to tap into a pool of overseas cash typically amounting to about half a billion dollars. "The extra interest we're earning alone is almost $10 million," he says. "It's hard to quantify our savings from not borrowing money, but you could make the argument that it is in excess of our weighted cost of capital."
A Dose of Humility
Even the biggest banks admit that while they can provide many services to many clients around the globe, they're never likely to be a pure one-stop shop, especially for the world's largest multinational corporations. "Large companies have multiple banking relationships, which is really productive," says Citigroup's Druskin. "You can't really do everything through one institution."
Most wouldn't even if they could. For starters, large multinationals need multiple banks to back their credit revolver, since no one institution wants to bear the full risk of that facility. Yet because revolvers are a low-margin business, those same banks want other pieces of the client's business (see "Inside Your Banker's Head"). "Most companies have a significant problem allocating enough banking business to their revolver banks to satisfy them, much less putting all of their eggs in one basket," says consultant Jeffrey Wallace, managing partner at Greenwich Treasury Advisors LLC in Naperville, Illinois. Besides, he says, "no treasurer wants to be in a position where all of her cash flows are in the bank accounts of one bank. In a default, all of that cash would be taken." Then there's the issue of competition. "Shopping for services is not a bad thing," says Druskin. "At one point in my life I was a CFO, and I always did it."
All that said, many finance executives find that global banks can handle a remarkable number of services for them. In a CFO survey (see "Last Banks Standing"), 43 percent of the respondents who had overseas banking needs said global banks could meet all of their needs. For smaller companies with a modest international footprint, that wouldn't be surprising. For larger companies, it would be. Their typical strategy is to consolidate banking activities with different institutions: one bank or group of banks for cash management, another for foreign exchange, and so on. Stamford, Connecticut-based Pitney Bowes Inc., for example, has consolidated its letters of credit and bank guarantees with a single bank. McGraw-Hill, in contrast to UPS's experience, was able to set up a global cash-pooling facility in Europe two years ago through Deutsche Bank. Nokia handles the majority of its accounts-payable processes around the world — in Asia, Western Europe, and Canada — through Bank of America using one file format, according to Blair. It uses Citigroup for Eastern Europe and Latin America, and JPMorgan Chase for the United States. And Brown-Forman began consolidating much of its worldwide cash-management activity with Bank of America about three years ago when it transitioned to a centralized SAP treasury system, starting in the United States and then extending to the major markets in Europe. "At that time, Bank of America was cutting-edge with its global-payments technology. Since then, as we've expanded our SAP platform, we've been able to partner with Bank of America in just about every European market," says Wood. "We've grown that relationship and have been able to work with them in more places than we originally expected." Nonetheless, she notes, Brown-Forman continues to rely on HSBC for cash management services in Asia and on Citigroup in emerging markets. "HSBC and Citigroup are very capable of supporting our treasury systems, and we will be working with them more as we continue to roll out our cash platform."
Not surprisingly, one area where global banks shine is in cross-border M&A and capital-markets transactions. "If Citigroup is doing a deal for a Spanish company," observes Standard & Poor's analyst Tanya Azarchs, "they can distribute or sell that deal into the New York marketplace. Any corporate that wants to do a debt underwriting or a very large loan needs distribution in the United States, so they're not going to call on their local bank, but on Morgan Stanley or Citigroup or whomever." Case in point: Ashtead Group PLC, an $882 million U.K.-based equipment-rental company with major operations in the United States. When it wanted to do an asset-based financing last year, it turned not to a British institution, but to Bank of America, which arranged a $400 million revolving line of credit plus a $275 million term loan. The latter was structured as a multicurrency loan to Ashtead's U.K. and U.S. operating subsidiaries, governed under one facility to simplify syndication and eliminate restrictions on intercompany cash transfers between the United States and the United Kingdom. By making the loan in both dollars and pounds sterling, Bank of America also mitigated currency-fluctuation risk for Ashtead.
Where Global Banks Aren't
Emerging markets, not surprisingly, are the Achilles' heel of banks with global aspirations. Citigroup has made the greatest headway in penetrating these countries, but it still doesn't offer the same deep coverage there that it does in many other parts of the world. "When you get to Africa, you really have very few players, especially in places like Libya," says Paul Reinbolt, vice president of finance and treasurer at $45.1 billion Marathon Oil Corp. in Houston. "The same is true in the Middle East. Our three biggest banks can handle about 60 to 70 percent of our cash-management business, but it takes another handful to do the rest."
More so than in developed markets, varied and restrictive banking regulations can make it difficult for foreign banks to compete in emerging economies. Some countries limit foreign ownership of local banks, and others impose restrictions on the types of services that can be offered. Some require corporate employees to open accounts at the bank used by their employer to receive paychecks.
India and China are particularly difficult. Indian banking regulations effectively require multinational companies to use local banks for some services. China's government limits the degree to which foreign banks can participate in local currency operations (see "View from Abroad"). While both countries have countenanced limited incursions by outsiders, no global bank has made major headway. Among those with the best showing: HSBC opened two branches in western China in August, bringing its total on the mainland to 12. Citigroup's Website claims five branches in China, as well as a sub-branch and two offices. "We have big, single-country relationships with a couple of Chinese banks because the global banks aren't there yet," says Nokia's Blair. "They all have one or two branches, but the banking rules there make it impossible for them to cover all our needs."
Of course, companies sometimes prefer to work directly with local banks, in both developed and emerging markets, because the indigenous banks have expertise in local regulations and the necessary political connections, know the local businesses better from an M&A perspective, or have branch strength outside the big cities that foreign-based global banks can't duplicate. "We will often use a large bank in their own country," says Dessa Bokides, vice president of finance and treasurer at $5 billion Pitney Bowes. "They understand the regulatory issues and may know local market nuances that a global bank does not."
Efrain Rivera, treasurer at Rochester, New York–based Bausch & Lomb Inc., a $2.2 billion multinational producer of contact lenses and other eye-care products, says his company often relies on local providers for payroll services and local collections and deposits. In part, that's because the global banks have great reach at the commercial level, but not at the retail level. One reason: they tend to have their offices concentrated in major cities.
Making It Work
While a bank's geographic reach and technical infrastructure are critical to its ability to act as a global provider — Marathon Oil's Reinbolt stays alert for "vaporware" and solicits the experiences of peer companies when shopping for services — bankers and corporate treasurers agree that the success a company achieves in working with a global bank depends as much on the people involved as the systems behind them. "I place a high priority on identifying the right account executive within the bank," says Rivera. "You need someone with the ability to work around the world in the bank, someone who has established that credibility and has that experience so that if you have a need on the other side of the globe, they know who to call in the organization."
Look for an executive team with broad international experience, too. In an interview with London's Financial Times published in August, Citigroup CEO Chuck Prince conceded that even at the world's most global bank, the one area of management weakness is international experience. While some Citigroup executives do have extensive overseas backgrounds, Prince said he was conscious that the company is still too "U.S.-centric."
Once you've found a global bank and identified the right people to work with, make sure they get to know you as well as you get to know them. Wood says Brown-Forman works hard to develop deep relationships with its banks before it needs their services, not afterward. "You can't go from having a minimal relationship to accessing their skills all over the world if they don't really know who you are," she says.
Finally, for all the value that good people can bring to a global banking relationship, remember that unless your bank is working in the same parts of the world you are, it is bound to disappoint you in some ways. "It is critical that companies have access to global customer service not just in their headquarter region, but also in each of the countries where they have operating subsidiaries," says Daniel Rosenstein, head of U.S. corporate sales in Deutsche Bank's global cash-management practice. "Too frequently, global banks are pushing corporations into a predefined service model in which customer-service officers are not sitting within the countries."
"Being in more places does matter," agrees Citigroup's Druskin. "Clients want to walk into someone's office and deal with people who are part of that marketplace, understand the regulatory environment, and understand the way the financial markets work."
That's a global bank. How does yours measure up?
Randy Myers is a contributing editor at CFO.
Testing the Limits
Is the globe too big a stage for the world's banks? In June, JPMorgan Chase & Co. and Citigroup agreed to pay a combined $4.2 billion to settle allegations that they helped Enron Corp. inflate revenue and profits by hiding debt before its implosion in 2001. Just months earlier, those two banks, plus Bank of America, Deutsche Bank, and a number of others, had agreed to pay more than $6.1 billion to settle a class-action lawsuit brought by former investors in WorldCom, which had also gone belly up after accounting frauds.
Were those incidents isolated, it might be easy to brush them off as anomalies. But banks have been linked to ethical lapses around the world in recent years. In June, British regulators fined Citigroup $25.4 million and forced it to pay back millions of dollars in profit from a controversial European bond-trading scheme dubbed Dr. Evil by Citigroup traders. Although it wasn't illegal at the time, the scheme roiled the European bond market, angering other market participants. (Citigroup has since increased its controls, employee-training procedures, and compliance staff in the United Kingdom.)
Citigroup also was among the numerous banks that prosecutors in Italy have sought to indict over alleged securities-law violations tied to their work for Italian food company Parmalat, which collapsed in 2003. Other banks targeted in that case include Deutsche Bank, Morgan Stanley and UBS of Switzerland. Parmalat itself has sued Citigroup, meanwhile, which in turn has denied wrongdoing and countersued Parmalat.
Also this year, Citigroup was forced to shut down its private banking operations in Japan after regulators cited it for a lack of internal controls and oversight. Citigroup attributed the problem to individuals running the business there.
While these and other scandals would seem to suggest that banks cannot properly manage their affairs on a global basis, corporate finance executives are wary of drawing too much from the episodes. "Global operations are difficult from a control perspective everywhere," says Dessa Bokides, vice president of finance and treasurer at Pitney Bowes Inc. "Some of these banks have grown quite quickly. I don't think it's a direct reflection on the industry."
Gary Barth, assistant treasurer at United Parcel Service Inc., agrees. "I don't think it's indigenous to global banks; it's across business in general," Barth says. "When you have far-flung operations on a global scale, you're going to have controls that break down. I think Sarbanes-Oxley is going to help that, though."
U.S. banking regulators, however, are less sanguine. Earlier this year, the Federal Reserve Board told Citigroup to hold off on making any more acquisitions until it improves its internal controls. —R.M.
Meet the Players
The community of truly global banks is small. Finance executives and industry insiders interviewed for this article unanimously recognize only three: Citigroup, JPMorgan Chase & Co., and HSBC Holdings. Several interviewees include Deutsche Bank and Bank of America in that group, and a few also give a nod to ABN AMRO of the Netherlands. A smattering cite UBS in Switzerland, and Barclays and Royal Bank of Scotland in the United Kingdom as well, as banks with an increasingly international, if not global, presence. Among the monoline investment banks, they list Goldman Sachs, Morgan Stanley, and Merrill Lynch, all based in the United States, as having the broadest global reach. "The Japanese banks," quips one treasurer, "just are not playing the global game seriously."
Citigroup is widely acknowledged to have the greatest global reach of any bank. Tracing its corporate history to 1812, it generated 53 percent of its income outside of North America last year and maintained offices in more than 100 countries. It has more than $1.5 trillion in assets and is widely acknowledged to have the strongest presence in emerging markets, where many of its global competitors haven't yet established beachheads. However, some finance executives rake Citigroup for being less flexible than some of its competitors. "They've figured out what they think is an effective solution for the average corporation's problems and want to deliver the same thing to everybody," one treasurer observes. "If it happens to fit you, it can be quite a decent solution." Yet others say their Citigroup bankers have been good listeners and eager to accommodate their needs.
HSBC — which stands for the Hong Kong and Shanghai Banking Corp., the company's oldest business unit — has assets of $1.5 trillion and offices in nearly 80 countries. Like Citigroup, it is particularly strong in Asia, where many second-tier global banks are not. Perhaps the biggest difference between Citigroup and HSBC is not size, but product-line focus. While Citigroup is a major player in both wholesale (commercial) and investment banking, HSBC is a giant in wholesale banking but doesn't even crack the top 10 in global underwriting tables. Its various parts also tend to be less homogeneous than those of some of its competitors, according to one senior finance executive. "It's a very federal organization traditionally," the executive says, "with each country being a national fiefdom. If I were an HSBC shareholder, I'd be very happy about it, because it's a very effective model for [the very profitable] retail and middle markets — but not for the multinational market."
JPMorgan Chase, with assets of $1.2 trillion, does business in more than 50 countries and, like Citibank, is a force not only in wholesale banking but also investment banking: in 2004, it was ranked by Thomson Financial as the world's fifth-largest underwriter. Because it operates in only about half the countries where Citigroup has a presence, though, it is forced into a greater reliance on partnerships with other banks. While some consider it an aggressive marketer — "There's a perception that they will promise whatever they think you want to get the deal," one treasurer observes — an executive who works with the bank credits it with being diligent about making good on its promises. The bank owes its global culture in large part to the international background of one of its component parts, the former J. P. Morgan commercial and investment bank, which traces its roots to London in 1854. It merged in 2001 with Chase Manhattan Corp. to form JPMorgan Chase.
Deutsche Bank has assets of about $1.2 trillion and says it offers services in 74 countries in Europe, the Americas, Japan, the Asia-Pacific region, Australia, and New Zealand. Despite its strength in Europe and the many countries in which it operates, finance executives are widely of the opinion that its global reach doesn't match up with the Big Three. Its presence in the United States owes principally to its acquisition of Bankers Trust in 1999.
Bank of America, with assets of $1.2 trillion, has offices in 31 countries. Its more limited geographic reach helps to explain why corporate finance executives debate whether or not it belongs in the top tier of global banks. They credit the bank, though, with being flexible in its product and service offerings and having a global banking system that is consistent around the world. While some finance executives say the bank has a tendency to undersell its capabilities, it is easy to find clients who consider it just as aggressive — and capable — as its more far-flung competitors. — R.M.