John Wisbey's CEO Blog

About John Wisbey

John Wisbey is Chairman and CEO of Lombard Risk Management plc, a fast growing group of companies focused on providing software for risk management, regulatory reporting and valuation, and independent valuation services to the financial industry (LSE ticker symbol : LRM).

Blog History

	21st December 2007
	24th April 2007
	13th January 2007

21st December 2007

Part of my motivation for writing this blog is that I believe passionately in allowing smaller investors similar access to my own and the company's thinking that institutions expect to get. I have written about this before, but it really is hard to see that small investors don't lose out on AIM. They get less information, fewer chances to talk to senior management and much less access to placings which are often done at below the market price. Aside from outstanding exceptions like t1ps.com and Shares Magazine, there is so little coverage of AIM stocks that small investors really do need to do a lot of their own research. I would stress that the views here are my own and not necessarily those of all of my board, but again that is what an institution would get in a one on one meeting!

Among the main strategic issues our company needs to have a view on at the moment are the following, in the context that Lombard Risk does business with about 200 banks and quite a number of asset managers or hedge funds:

a)	How serious is the sub-prime crisis and the consequent effect on bank liquidity?
b)	If it is serious how significant will that be for bank and asset management firms’ technology spending?
c)	How is our own company’s current range of products placed within that? I have just put on record in my Chairman’s Statement that “the Group has had a record quarter for billings and has so far seen virtually no signs at all of a slowdown in spending by banks in those areas affecting the Group’s core businesses”.

I am struck by the disparity between the gloom and caution I hear from quite a few senior banker friends, and the fact that many of the traders who are mostly in their 20s or early 30s seem to believe this is no more than a short term correction. Perhaps it is simply because the latter have never seen a full scale recession and that they are as dismissive of the lessons of the past as any generation has been before them. Or they could be right and for every experienced risk manager in London or New York forecasting a downturn, there are Middle Eastern and Chinese investors waiting to snap up bargains and recycle some of the vast oil or manufacturing trade surpluses their countries are enjoying; a genuine new economy story in fact that few in work today have experienced before.

Where does this leave banks? The biggest effect of the U.S. sub-prime crisis followed by the incidents at Northern Rock, IKB, Landesbank Sachsen and so on seems to have been to dry up the interbank market (the lending by one bank to another). This is not because large banks have no liquidity, but rather that at a time when there are rumours about the solvency of individual banks no bank wants to be left having lent to that bank – there is little income from lending to other banks and certainly no prizes for getting it wrong. This in turn means that those banks that rely on net interbank funding are being much more cautious about doing business in case they can’t fund it. Presumably bank regulators are also making clear that this would be wise! Add to this the fact that the business a bank would previously not have taken onto its books but would have securitized or syndicated can no longer easily be laid off, and this further dries up borrowers’ access to funding and also pushes up the price of the lending margin a bank is going to charge. And to make it worse some of the loans that already had been securitized have had to go back onto banks’ books. So in summary I think that what this means for banks is the following:

Banks already have had to cut back on their corporate lending and this won’t end soon.

The lending margin on the new corporate lending that banks have done has and probably still is going up in a period of rationing of credit, and therefore profitability from lending may still be holding up well.

The write-downs banks have had to take on sub-prime and CDOs are now largely in the market although there are still difficult valuation issues when there simply is no price for the size of position a bank has, and it may well be that the mark to model approach used by many banks still does not represent the worst case – why else would a delegation of the big accounting firms have spoken with the FSA about this subject recently?

The real issues for banks are:

i.	The one off write-offs on CDOs and sub-prime have had at least a temporary adverse effect on bank capital ratios and on the amount that banks can lend - unless like Citigroup, Barclays or UBS they raise new money.
ii.	Liquidity constraints for banks that have less non-bank deposits than they do non-bank lending. Of course fear can change this balance and rapidly erode a deposit base, the extreme recent example being Northern Rock. Any such fear strengthens strong banks and weakens weaker banks.
iii.	Any possible increase in bad debts owing to more borrowers having difficulty in re-financing will be a threat to bank profitability balanced by the higher lending margins banks are charging.

My guess is that of these ii. is the issue now and iii. is going to be the real issue, and it is to address both that the central banks are injecting so much liquidity into the system. The European Central Bank’s injection of EUR350 billion this week really is a very large amount of money.

Given the above issues for banks, it seems to me almost inevitable that banks will be looking, in as discreet a way as possible, to reduce their costs. Why discreet? Because in the current market, when every bank is questioning the credit worthiness of all its customers, no financial institution wants rumours going around that it itself is suffering from lack of liquidity. That will inevitably mean deferring non-priority expenditure or growth justified expenditure whether on recruitment, premises or technology. This will surely hurt rental levels and occupancy rates in the City, event organizers, those seeking large bank sponsorship, and anyone selling something a bank can do without for a little longer.

I look at this macro picture and it argues for a firm like Lombard Risk that supplies banks and asset managers/hedge funds to be lowering its revenue forecasts for calendar 2008 and cutting its own costs appreciably ahead of a likely downturn. But then I look at our own order book and find that we have had a record last three months for billings and that our key issue is managing implementation of multiple regulatory projects rather than any lack of new business. I attend our weekly management meeting, and find that our sales pipeline for 2008 is healthy and that new deals are there to be done. This argues for not cutting back.

Every CEO or business leader receives lots of advice, both internal and external, and has lots of data to look at. Inevitably not all of that data or advice points in the same direction, but it is still a CEO’s job to navigate through fog which will miraculously lift with the benefit of hindsight. The present situation for us where the macro picture is worrying while our own micro picture is encouraging is an unusual conflict in that data. But here is our thinking at present:

i)	The regulatory software side of our business is likely to be relatively immune to the overall issues in the banking sector and the economy provided we do not see the disappearance of many banks through mergers or the closure of London branches of foreign banks. Banks have little choice but to comply with regulations, although sometimes they do successfully lobby for delay in the implementation of regulatory change.
ii)	With credit risk such a big issue at the moment, expenditure in the credit risk and collateral management area is likely to remain strong, and our Colline product should actually benefit from this. A bank doesn’t want to risk being the last bank able to make margin calls from a risky derivatives counterparty because it has sub-standard systems.
iii)	We have been and intend to continue growing the proportion of our headcount in Shanghai. In some areas like the current regulatory surge we have had to add to UK headcount in the short term, but in anything other than the short term the Shanghai factor should allow us to reduce costs without reducing our delivery capability.

I am glad that unlike many technology firms our business model for 2008 doesn’t revolve around selling product or hardware upgrades for which banks see only marginal benefit, since that kind of expenditure will surely be at risk in 2008.

In summary I think that the business model we have at Lombard Risk should allow us to perform well in relation to other software companies selling to banks, and that we should almost be judged as a standalone company rather than as an IT company. Our current share price of just under 5p values us at below 1 x historic revenues, and well below 1 x analyst forecast revenues. Quite a number of software companies trade in the range of 2-3 x historic revenues. More than that I should probably not say!

24th April 2007

I've been having quite a bit of interaction with fund managers recently thanks to our excellent Investor Relations professional Peter Gaze. Many small company CEOs lament the fact that their broker takes too little interest in their story, so perhaps the best way of ensuring one sees investors is to arrange it oneself. Companies don't expect a broker to arrange all their meetings with clients, so why on earth should that be the case with investors? As a company gets bigger, investors will be more inclined to find the company, but smaller firms have to do more of the work themselves.

What this always throws up is the huge disparity between what institutional investors learn about a business and what smaller private investors get to know. The securities laws are designed to protect smaller investors, but they also take away much of the ability a company has to treat its shareholders equally.

Here are a few examples :

1.	If one offers shares for a significant amount to more than 100 investors, a full prospectus is necessary. This is a major expense and causes huge delay following implementation in the UK of the EU prospectus directive; not only are the lawyers fees much higher but the FSA needs 2-4 weeks to read the prospectus. So even though CEOs like me would much prefer to make shares available to all our shareholders and to new private investors, it is much quicker and more efficient to have shareholder approvals to disapply pre-emption rights and approach a few institutions.
2.	One might like to approach a few friends who one knows can afford a few thousand pounds and see whether they would like to invest. But to approach them without falling foul of the Financial Promotions legislation one has to obtain prior to those conversations a certificate saying that the person is a high net worth individual. Even if a CEO like me knows the person is well off he could be at legal risk if he doesn’t get such a certificate.
3.	New issues are usually done at a discount to the current share price. Moreover for some companies there are EIS or VCT tax breaks for investors in new shares which do not apply to buying shares in the secondary market. So by being excluded from placings the private investor loses not only on price but also on tax breaks unless he puts his money in an EIS or VCT fund and invests that way or unless he has a managed account with a Private Client stockbroker. Many investors I know would rather invest their own money directly into a company and avoid the 4% management fee and 30% carry fees of an EIS fund, but this is made more difficult by the rules designed, rightly, to protect Aunty Ethel! And our firm is still EIS eligible until July 2007 when, because we have 120 employees, we will fail the test of less than 50 employees introduced in Gordon Brown’s last budget.
4.	When a transaction is going on, many institutions that would potentially be buyers are unlikely to buy in the market or are precluded from dealing. For a company on the up, an institution has no reason to buy in the market if it knows it can buy more cheaply in a placing, and once it becomes an insider it is precluded from dealing. So all the poor private investor knows is that trading volume has gone down and that the share price is not doing much. I wonder how many shares are sold at such times by private investors when informed institutions are not wrong-footed in a similar way.

I don’t know the solution to these issues, because everyone is acting in good faith and complying with the law, but the end result is that the private investor is systematically disadvantaged by the rules if he or she invests directly, and by management fees if he or she invests through a fund. My own favoured solution will be to find legal ways of reaching out to private investors to put them on a more level playing field with institutions but without costing the company huge extra expense and time. Anyone with good ideas on how to do this is welcome to e-mail me on

Time to get back to work. Our firm should be a major beneficiary this coming year from Basel 2 upgrades by all its regulatory reporting customers in the UK. And our information is that some of our competitors are behind with their Basel 2 products, so that gives us a good opportunity to gain market share!

13th January 2007

It is 5 a.m. in London but here, on my way back to London from Shanghai over the Gobi Desert north of Beijing, it is 1 p.m. and the landscape looks absolutely freezing.

I have become quite a regular visitor to China owing to our office in Shanghai where we now employ 32 people, but every time I come here I still feel privileged to be able to make frequent visits to this interesting country that is such a rising force in the world.

This week I spent time in Beijing as well as Shanghai. It is a place of enormous change, almost unrecognisable from the Beijing of 10 years ago. And although Shanghai, where Lombard Risk is based in China, is where most foreign banks set up, Beijing is still the place where most Chinese banks have their headquarters.

As I arrived in Beijing I read that the largest Chinese bank ICBC now has a market cap second only to Citigroup, having overtaken Bank of America last week. But so once did the main Japanese banks! Will the Chinese banks become stronger and stronger or will they make the same mistakes as their Japanese counterparts did fifteen years ago? We need to help them with our risk management products to stop that happening.

The visit to Beijing reveals other interesting information. Some of the major commercial banks have 10,000 branches in China; there are 28,000 banks in China (sadly most of them much too small to be targets for Lombard Risk). I can see that Beijing has changed beyond recognition, but to validate this a colleague shows me a newspaper article which says that of the top 200 bars in Beijing five years ago only seven exist today. Either their buildings have been bulldozed to make way for the future, or they have gone out of business. I bargain a furry hat for my daughter down from RMB 200 to RMB 35 (£2).

We meet some impressive people in Beijing at banks and regulators. The top people there are world class but it is that much more of an achievement that they can get things done in such a huge country.

Back to our Shanghai office in Pudong where we are building up an excellent team. Within the last year we have managed to develop Chinese bank regulatory reporting to a high standard; this would have been a hugely speculative project in the UK but now it is a low risk project for us, and we are the obvious vendor for foreign banks to select – and in due course Chinese banks. Making our systems multi-lingual suddenly has huge buy in from the team which it would never have had in London. Our Oberon product has been moved forward very satisfactorily since my last visit, and I discuss issues around binary options on Fed Fund futures with our Chinese development manager.

I host lunch for 9 people from our office in an excellent Chinese restaurant overlooking the Bund. The bill comes to RMB 1,100 (£70).

Just as I am thinking how efficient China is, I get involved in a conversation about increasing the capital of our Chinese company. Back to red tape – we have to submit a business plan to the Chinese authorities explaining why we need a capital increase and explaining how software is a growing business. All so we can invest more money in China and employ more Chinese nationals ! Surely with foreign exchange reserves of $1 trillion they will relax these kind of controls before too long.

It’s late on Friday afternoon and I see that the Lombard Risk share price is back up to 10p again. We announced earlier in the week that we were on track for 50% like for like revenue growth. That is based on the growth of our regulatory software business, our collateral management business and our ability to scale up our operations in China at much lower cost than if we had to do it in the UK. It has been a tiring week, but I leave feeling we made a very good decision setting up in China.