Making a drama out of a crisis?

Anglo-Romanian Bank Chief Executive Thomas Butler explains that the current downturn is merely a blip that needs to be managed through.

“Although we're going to have to cut back a bit on our activities, now is not the time to get demoralised and discouraged”
-Tom Butler, Chief Executive of Anglo-Romanian Bank

My strategy as CEO has been to focus on a geographic niche. I joined the bank in 2004 whereby we operated as a single bank located in London with a history of a trade relationship-financing bank. When I arrived, the board gave me a mandate to buy two similar banks, one in France, one in Germany, which we did in 2004, and integrate them into the UK bank. Since then we have gone from being a stand-alone bank in the UK to a multinational bank reaching across the EU and particularly into Romania which joined the EU last year.

Our goal of creating more reach and breadth across the region has therefore resulted in a more complex organisational structure. Initially, the main part of our expansion was Romania, but then we continued to broaden our geographic reach to other parts of the Balkans, particularly former Yugoslavia and Ukraine, Russia and some of the other countries around the Black Sea. 

My secondary focus has been toward enhancing a more corporate business, a strategy we have been executing for the last four and a half years. We’ve been able to capture a number of key corporate relationships and have seen considerable success as our profitability has increased and cost efficiencies have improved.

The credit crunch is a global problem, with no country or financial institution being exempt. Its impact on Anglo Romania Bank is determined by the extent that liquidity impacts those banks that we have credit relationships with and their ability to refinance or pay back existing exposures. There’s evidence that the IMF and other institutions will make liquidity available. Certainly, in the case on the Central Bank of Russia, there’s an enormous reserve of hard currency that is being fed into the banking system to alleviate some of that stress. 

In terms of our own banking operations, we’re also confronted with issues of tighter liquidity which inevitably impacts the cost of funds. It determines the size of your balance sheet, and there’s simply no liquidity in the market right now to go ahead and fund yourself.

Customer satisfaction is clearly very important for financial services organisations, and delivery of this whilst simultaneously having to pass on those increased costs right now is difficult. Customers traditionally want the best service at the cheapest price and the only way to overcome this conflict that continuously exists is to demonstrate to your client that you are really adding additional value, whatever the state of the economic climate

This is not a matter of simply the cheapest price for a product. For any institution to be successful it has to demonstrate to a client that it is providing something additional to a standard commodity product, such as credit. In our case, we are focusing our client managers on understanding our particular clients and working with those clients to define a strategic vision that they want to achieve over the next two or three years. We want to be known as a ‘trusted financial partner’, our clients investing trust in us to help guide them through the financial marketplace and achieve their business objectives.

Of course, that’s not an easy thing to do. We find ourselves facing cultural issues, product limitations and there’s also the challenge of managing expectations. We’re in a phase right now in the wholesale market where there are clients that we simply cannot lend additionally to because due to higher prices there simply isn’t money available. This ultimately creates tension with your clientele and therefore the only way to overcome this is to reemphasize that this is a short-term peculiarity of the marketplace. Our focus is to reiterate that we’re going to be here for the long haul and we will continue building working relationships with our clients during the good times and bad times.

In order to ensure that our staff enhance investor enthusiasm and provide competitive differentiation, we are specifically focusing on the quality of our service delivery. As a relatively small bank the training of each member of staff is a specific and continuous process. Our focus here is in the Romania staff, which is the largest part of our ground operations. We also use what we call a cultural approach, whereby myself or colleagues who have more experience and more seniority are able to go into the marketplace with our local staff, calling on clients and demonstrating the values of the institution.

Making a diagnosis

As CEO, it’s important to appreciate that there’s a difference between symptoms and causes and to understand what the underlying nature of the business is. What’s giving rise to the problems you’re seeing? I think if we take a look at the current credit crisis, in my view the cause is excessive leverage. Banks, financial institutions and investors moved from relatively conservative measures of how much leverage to take on to extremely high amounts of leverage, sometimes 40, 50, 100 to one. That was fine as long as you had asset inflation and you could continue to leverage up, but as soon as asset deflation emerged, which began with the housing bubble crash in the United States, then the impact on the de-leveraging was extremely accelerated and intensified these problems. Why then was this kind of leverage permitted? Was this a failure on internal regulatory controls or a symptom of the unbridled greed to address those causes and prevent the symptoms from reoccurring?

To understand this we have to look at the underlying market conditions and not just as momentary blips in the market.  So, how do we do it? It’s just a matter of separating what are the symptoms from what are the causes and then looking at it in a logical and evaluative way. What we are reiterating to both our staff and clientele is that this is a blip. For our staff, although we’re going to have to cut back a little bit on our activities, now is not the time to get demoralized and discouraged. Yes, it is going to be stressful and difficult, but the priority is to communicate to your clients that this is an unusual phenomenon. This blip is temporary, but whether it be six, 12 or 24 months we’re here for the long haul for both clients and staff.

Playing it safe

In terms of our capital and our balance sheet we are a strong bank. We have benefited from not engaging in excessive leverage or not investing in a lot of synthetic derivatives. Instead, we operate on an old banking strategy and that’s going to be a strength for us to get through this. Of course, there will be constraints and we’ll have to live with those constraints, but ultimately, we will be a stronger and better bank which provides more opportunities in terms of our market share. 

Providing such a solid foundation through conservatism is vital, but we are aware that this does not necessarily produce the most exciting news for our shareholders. We are attempting to retain the balance but it is difficult in light of the greed that occurs in the marketplace. There are certainly profit driven motives, and individuals and institutions are constantly trying to maximize their profit and shareholder value, resulting in an inevitable conflict between the short-term maximization and a long-term maximization of value. 

One of things institutions and investors need to look at is whether that short-term focus is leading to these kinds of crises periodically. I’ve read a lot of these investor newsletters describing these instruments and I didn’t understand how I could get all my money back and still get a higher guaranteed return. My very simple philosophy is if I don’t understand it, I don’t do it. It’s simply a matter of common sense. Do you understand what you’re doing?  Do you understand the risks involved in it?  Is the reward you’re getting for taking that risk adequate? Then fourthly, do you know that you are in a position to control some of those risks or mitigate some of those risks, if things don’t turn out exactly as you expect?

I’m oversimplifying because there are enormous pressures in the investor community to deliver certain profits. If you miss those estimates, your share price gets hammered and the board of directors and management come under criticism from the large institutional shareholders. There is a lot of pressure to jump in and imitate other strategies that are capturing this risk but as more people do so, the likelihood and not the perception of failure increases.

One for all

Balancing the need for autonomy from each of our business lines with a need for synergy across the enterprise is an ongoing and difficult task. Individual units have their own profit goals and are driven to meet those targets. At the same time, we have consolidated overall targets and have produced longer terms for our strategic targets, so the business lines aren’t always perfectly coordinated. All we can do is to try to emphasize that all the units are part of a whole and we’re judged by the success of the overall bank, not by the success of an individual unit. 

What I’ve done in terms of performance measurement is to lessen the performance reward for the individual unit, at least at the senior management level, and increase the component that reflects the overall performance of the bank. In all of this, taking into account the extent to which they’re working with other units and trying to cross-sell and build synergies does not come without its difficulties. You just have to continually emphasize that we’re not silos. We’re part of a larger organisation and if the overall organisation does poorly, whilst one group does well, it’s going to result in the demise of the overall organisation. So we all have to pull in the same direction and sometimes we have to sacrifice the local profit to achieve the overall strategy and the overall success of the bank. 

The metrics and reporting that is ensuring our organisational development are done in a frequent time frame. I’m copied in on all initiatives from offices that involve another office so I can see who’s attempting to initiate or generate business by cross referrals. I also have a method of following up in terms of tickler files to see the outcome of that referral and to ensure a member of staff followed it up. I also bring my senior staff together every couple of months during which we talk about these issues again to try to highlight how important it is to work together as a team and avoid those silo mentalities that can be so destructive of team ethos. 

Of course, as a small organisation we don’t have the complexities of larger institutions such as Citigroup. I’ve got only four branches in Romania, a branch in Frankfurt and my operation in London so we have a very direct operational approach and a strong view of what is going on. It’s primitive, but it works in a small organisation.

Thomas Butler has been CEO of Anglo-Romanian Bank since 2004 and has been at the forefront of a major transformation programme. Prior to Anglo-Romanian Bank he spent more than 20 years at JPMorgan Chase in various senior roles.

Anglo-Romanian Bank is the only international bank with its core business focused in Romania. In operation for more than 30 years the bank now has capital of over €100 million.