View from City Road: The Warburg image collapses

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The Independent Online
Is Warburg's profit warning just a temporary blip in the bank's ever onward and upwards march, little more than a reflection of the cyclical downturn in securities markets, or does it disguise more deep seated problems? Certainly there has been a growing perception in the City that Britain's flagship investment bank is spreading itself too thinly, aspiring to everything a modern investment bank should, but perhaps lacking in the resources of management and capital to equal the task.

The problem is easily stated. Warburg succeeded beyond most expectations in building an integrated City investment bank in the 1980s, overshadowing all its London rivals in the domestic markets. But in the 1990s the real battleground has become an international one.

Warburg has found itself struggling to develop a strategy to meet growing competition in London, New York, Frankfurt and Tokyo from bigger and more heavily capitalised investment banks.

The response has tended to be too little, too late. Worried by the fat profits being made in proprietary trading among the American investment banks last year, Warburg stepped up its efforts in this area. Good idea, but nobody is making money out of proprietary trading any longer. The expansion into derivatives has also been cautious and slow.

With the possibility of an all-embracing international alliance, such as the mooted link-up with JP Morgan last year, apparently ruled out, Warburg is left to its own devices, looking for organic growth to beat the competition but without the critical mass in some important areas to make a convincing show. That hardly seemed to matter as long as the old Warburg magic was evident in the areas it knew best, such as European corporate finance.

Even here, however, there are now question marks. Rightly or wrongly, Warburg was blamed for the disastrous failure earlier this year of Enterprise's takeover bid for Lasmo. On all fronts, Warburg has a substantial confidence rebuilding exercise to undertake.