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(Today, structured products are the main profit engine in fixed income, targeted to generate $800 million in profits in 2004.) This access to investors, in turn, helped Wachovia attract more corporate borrowers.Īs a commercial lender with a strong foothold in the real-estate market, Wachovia started out by building its corporate and investment banking capabilities around structured products in real estate. Although these smaller deals didn’t generate the kind of fees usually paid by blue-chip borrowers, the higher spread they offered helped attract institutional investors looking for better returns. “We had a menu of corporate clients who were relatively infrequent issuers in the high-grade market, and because of that they sometimes traded at wider spreads to more on-the-run names,” Arledge says. Instead, Wachovia’s strength lay in its commercial banking business, and its relationships with medium-sized corporate borrowers who sometimes tapped its investment banking capabilities. “We had lending relationships with a lot of corporations, we had assets we had financed through various conduits, we had all the pieces of the puzzle except for the structuring, trading and distribution end of the fixed-income business,” Arledge says. In 2001, the year of its merger with First Union, when Wachovia became the country’s fourth largest bank, the fixed-income effort was scattered across various divisions, generating annual revenue of $800 million. Wachovia, first and foremost a commercial bank, barely had an investment banking presence until a few years ago. “Whether or not they are going to be able to compete in the long term with the bulge bracket investment banks, and firms like Citigroup and JPMorgan, remains to be seen.” That is going to require them to have access to and capability in fixed-income markets,” says Matt Burnell, banking analyst at Merrill Lynch. “Clearly they want to become a more meaningful player to their corporate customers.
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In fact, he argues that Wachovia would be expanding many times over if market conditions were more encouraging to borrowers and investors, who drove a massive bond rally over the past few years.Īnalysts are drawing mixed conclusions about Wachovia’s evolution. “We obviously are aware of the fact that the market dynamics are going to be less positive than they’ve been in the high-grade business, so we’re adding at a rate which we think is in line with what the opportunity is.” “Our platform still has lots of room for growth,” he says.
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Underscoring its commitment to the fixed-income expansion, Wachovia has just poured $13 million into enlarging the trading floor at its Charlotte headquarters.Ĭurtis Arledge, the 39-year-old head of Wachovia’s fixed-income group who is overseeing the expansion, says he intends to grow revenues 10% this year to $2.3 billion-driven mainly by growth in the credit products area, particularly investment grade and leveraged finance-despite the anticipated decline in overall fixed-income activity as interest rates rise. In the first quarter, the group doubled the share of high-grade corporate bonds it underwrote from the previous year, breaking the top 10 ranks for the first time ever. So far this year, the country’s fourth-largest bank has added 40 new traders, originators and sales people to its fixed-income workforce of 1,500, with plans to add 100 to 125 more. The Charlotte, North Carolina-based commercial bank has spent the past decade building up its investment banking capabilities, and this year it’s making an ambitious claim on markets dominated by behemoths like Merrill Lynch and Morgan Stanley. Wachovia is pumping up its fixed-income operations, plucking credit experts from competing firms and inching its way up the league tables. A migration is under way in the bond market, but the moves are emanating from points further south than Wall Street.