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GLOBAL CUSTODY - The Global in Global Custody

Banks are targeting fast-growing markets outside the U.S.

On July 5, three days after Bank of New York Co. completed its $16.5 billion takeover of Mellon Financial Corp., the new Bank of New York Mellon Corp. announced an agreement to buy out ABN Amro's 50 percent interest in ABN Amro Mellon Global Securities Services, for an undisclosed price. Mellon had set up the joint venture in 2003 to house its global custody business outside North America; under new ownership those activities are back under one corporate roof, in a unit called BNY Mellon Asset Servicing.

This was no mere neatening of an organizational chart or balance sheet. BNY Mellon was adapting its business to the increasingly international nature of institutional portfolios -- underscoring the global in global custody, as its rivals have been doing. "The custodians are seeing the business go global and are trying to rapidly expand and diversify their revenue streams," notes Matthew Nelson, senior investment management analyst at Needham, Massachusetts, research firm TowerGroup.

Institutional Investor's annual ranking of firms by their global custody assets -- the cross-border subset of the business -- highlights this trend. Citi retains its top position, with assets of $6.7 trillion as of March 31, up 26 percent from a year earlier. Citi has by far the biggest subcustodian business, which comprises the bulk of those assets. BNY Mellon, which combines the Nos. 2 and 8 players, would have edged out Citi at the top, with $6.8 trillion, if the merger had been completed by March.

Eight of the top ten firms on the global custody list posted increases of 22 percent or better.

Total custody assets, global and domestic, also rose by double-digit percentages: JPMorgan Chase & Co. was up 25 percent, to $14.7 trillion; Bank of New York rose 21 percent, to $13.8 trillion; State Street Corp. gained 15 percent, to $12.3 trillion; and Citi was up 22 percent, to $10.7 trillion. Postmerger, BNY Mellon would have topped the standing with $18.7 trillion.

James Palermo, co-CEO of BNY Mellon Asset Servicing, says the addition of ABN Amro's business will help increase the international share of its custody revenues to nearly 50 percent, from 40 percent currently. As that deal suggests, acquisitions are part of the bank's growth plan. BNY Mellon continues an 11-year-old joint venture in Canada, CIBC Mellon, which has a 30 percent market share in that country. And the bank is spending a healthy $600 million a year on technology for asset servicing. "As cross-border investing becomes more complex, we win when we invest heavily in supporting derivatives and other alternative investments, exchange-traded funds and further enhancements to services, such as performance and attribution analysis," says Palermo.

Brown Brothers Harriman & Co., with global custody making up 81 percent of its $1.7 trillion in total custody assets, established itself internationally more than a decade ago, and "now the other U.S. custodians are racing to get revenue outside the States," says Timothy Connelly, Boston-based head of investor services for the Americas. Sixty percent of revenues are non-U.S., on the way to 70 percent within five years, Connelly notes. Brown Brothers maintains its historic emphasis on organic growth, which, says Connelly, means it can spend its entire technology budget on client applications rather than on the complications of acquisitions.

Even as they add scale, the global giants are working to be more local. Northern Trust Co., which gets 30 percent of its revenue from outside the U.S. and boosted global custody assets by 31 percent, has decentralized the management of international activities that had been run out of London. Timothy Theriault, president of corporate and institutional services, says the Chicago-based bank is planning to increase its Bangalore, India, operations center workforce to 800 from 600 by year-end, while adding staff in a new Melbourne, Australia, office and opening one in Limerick, Ireland, to complement its Dublin center.

HSBC Bank, which advertises itself as "the world's local bank," has all of its custody operations outside the U.S. and considers that "a head start and competitive advantage," says Michael Martin, global head of institutional fund services at London-based HSBC.

JPMorgan is relocating staff to China. In Japan it is hiring client management people who speak Japanese and are familiar with European markets, which have become popular investment destinations. "It's really important to have the big, scale-based processing hubs that allow for efficiency and productivity, but it's also important to make sure we have a touch-and-feel that is local in terms of client service, relationship management and operations," says London-based global custody head Rajen Shah.


The ranking was compiled by Researcher Charles Diffenderfer.