Why are you structured so that there are two heads of Asia, one in Singapore and one in New York?
Goldie-Morrison: We used to have a head of international, which was like a minister without portfolio. We were at a stage in our evolution where products were very dominant. Products ran themselves globally and they were all powerful. To have someone in New York who was solely responsible for the region was unnecessary. So now I have product and regional responsibility.
Does it work out that most of Bank of America's business in Asia is in the debt markets?
McCarthy: Not really. The business in Asia is very balanced. About one third is global markets, which is Duncan's area of tradable products in the debt and FX markets. Another third is the treasury services of cash management, trade finance and traditional transactional banking. The last third is debt capital raising and structured finance. It's a very well balanced business.
You have been very quiet over the past year or so. What has been going on in Bank of America in Asia?
Goldie-Morrison: Asia is more of a debt market than anything else. And we want to be the arranger of capital, which means getting debt onto and then off our balance sheet. We want to be in the middle of a chain and not at the end of a chain. In certain markets you can only be at the end of a chain. And so we looked at those markets and looked at their growth potential and realized that we didn't want to be in that game. So we pulled debt market resources out of the Philippines, Thailand, Indonesia and Malaysia although we left the transaction services people there.
McCarthy: We've ensured that the resources in those countries will predominantly focus on transaction services, payments and trade. The resources in the other countries will be more widely focused on the three areas we mentioned before.
Goldie-Morrison: We have used the resources we pulled out and refocused them on the markets where we felt we would have a more attractive business model and where the growth prospects are better. So all last year, we were going through this process of changing the model. We are now focused on the countries we are interested in and very much focused on growing our global markets, debt capital raising and global treasury services divisions.
We are also focusing on a core set of clients, which are prepared to use a broad array of our services, not just offering them access to our balance sheet. Just anteing up credit is a bad proposition to our shareholders. But lo and behold, this year our returns have really started to pick up and Asia is now our highest performing region in the world. Asia recorded ROE of over 20% for the first quarter this year, a record for the franchise.
It must be very difficult finding the right balance between making lots of profit and making the clients happy.
Goldie-Morrison: Yes, but clients realize that you are not going to have a long relationship if it is all one sided. We tell them that with X amount of our capital providing Y amount of return equals an ROE of Z and they realize that if they were in our shoes they would not be doing the business.
McCarthy: Many of our clients are banks as well and they want stable, profitable banks to do business with.
So how much of this strategy is borne out of mistakes that Bank of America might have made in the past in Asia?
Goldie-Morrison: When you had NationsBank and Bank of America you could see that both banks were quite liberal with their balance sheets, everywhere in the world. Also the development of product to get the loans off the balance sheet was not great. But the biggest issue was in the US not in Asia. Now we have taken our balance sheet down from $99 billion to $60 billion in 18 months.
McCarthy: Everything we did in terms of restructuring last year was to look at who were our key clients across the region and then what were our key strengths through which we could make money. The individual platforms that we reconfigured in each country came from the study of who were the key clients and what products would they need. So to answer your question about past mistakes, yes there is a degree of correlation between those countries we are not concentrating on any more (other than working capital products), with how we have fared over the years in those countries. However, the reality is that, compared with other US-based banks in those markets, our absolute loss has actually been very small.
Goldie-Morrison: Also over the last two years the markets have changed a lot. There is now much more liquidity in all the local markets. That money is coming into the domestic banking system or it is looking for outlets in the domestic market. So liquidity in the local markets has picked up and therefore borrowers don't need to look at the dollar market. The pricing difference means that a borrower can go to the local markets at cheaper prices than he can go to the international markets. So where you used to be able to have good business doing US dollar syndications out of Hong Kong, now that business has really quieted down. The local markets can now support the capital needs of the major entities in each market.
So international banks now need to build local businesses in each of the markets. You need fixed income, you need derivatives, and you need secondary markets. In each local market what used to be your treasury now looks very much like a fixed income business. Treasury is now just one piece of that pie.
So is that your plan around the region - setting up local fixed income businesses? And if so, who are the clients?
Goldie-Morrison: The clients are now on both sides. They are the companies who want capital. But now we also have to develop the institutional investor client base in those markets. That is a client base that banks used to ignore, because we used to be the providers of capital ourselves.
McCarthy: Phase one of what we've been doing was picking the clients we want to keep with us. These are the top indigenous companies and financial institutions and then the multinationals that work in those markets. So rather than having 4000 clients across the region now we have 50-80 clients in each market
On the trading side, you must have made good money in the fixed income markets over the last year?
Goldie-Morrison: We don't want to have big carry positions in our fixed income trading business. That's like writing earthquake insurance - it's great until the chit arrives. As a company we obviously have to be in the market but we do not want our traders running up big balance sheets by running big carry positions and then trying to be paid like a prop trader. All they are really doing is just leveraging our balance sheet again.
McCarthy: We would far prefer to have the majority of our income coming from client related business across every product.
(Read the second part of this exclusive interview tomorrow when McCarthy and Goldie-Morrison discuss the bank's recent deals and its renunciation of league tables.)