The world’s biggest custodians are struggling to grow. Still, many are managing to push their asset totals higher. How are they doing it?
By Jeanne Burke
September 2001
Institutional Investor Magazine
The Global Custody Ranking results are available in the Research & Rankings section of this site.
Global custodians are constantly forced to adapt to changing financial market cycles and locate the pockets of opportunity. The current economic downdraft is so all-encompassing that even small openings are hard to discern.
“Normally, you might hit a down spot in Europe, but the U.S. or Asia would be going strong,” says Thomas Perna, senior executive vice president of investments at Bank of New York, which handles the third-biggest chunk of cross-border assets in Institutional Investor’s annual global custody ranking (see table). “This is the first time when nothing is happening anywhere in the world,” says Perna.
In such a tough environment, the well heeled have a big advantage. In the 12 months through March 31, Perna’s BoNY eked out a 1.7 percent increase in global custody assets, to $2 trillion. In fact, 13 of the top 20 custodians posted year-over-year gains. Many of those were slight, to be sure, and BoNY, the largest bank in total custody assets, isn,t alone in reporting recent declines in custody revenues.
Even amid the squeeze, the leaders are trying to bulk up by acquiring smaller, more constrained participants. Perna expects BoNY to continue to be in the market for custodians that are increasingly hard-pressed to compete.
“Scale does matter, and you need to have it to afford technology investments and a state-of-the-art business,” says Thompson Swayne, head of global investor services at J.P. Morgan Chase & Co., No. 2 in global custody assets.
“We,re looking at volatile markets, increased globalization and continuing consolidation,” states Sandra Jaffee, executive vice president of worldwide securities services at Citibank. “There’s nothing in the environment that will change that, except to make it faster.”
Executives like Perna, Swayne and Jaffee say they continue to invest in making settlement faster and easier worldwide as pension reform brings new money into the financial markets. Nor can they avoid or delay the costly preparations to settle securities transactions one day after the trade date , the so-called T+1 timetable that the U.S. Securities Industry Association has mandated for June 2004 and that is likely to prompt similar changes around the world, much of which runs slower than the current T+3 U.S. equities standard.
Citibank, with the bulk of its assets in the cross-border category, again tops the II survey of global custody banks, based on assets invested outside of clients, home countries. At a shade over $3 trillion, Citibank beat J.P. Morgan by $809 billion and BoNY by $1.02 trillion. Citi widened its lead over J.P. Morgan , which suffered a 5.2 percent decline in global custody assets , by almost $200 billion. (Because of a reporting error by Citibank, it was incorrectly listed fourth in the September 2000 global custody table. Citi’s adjusted number for March 31, 2000, is $2.938 trillion, not $1.625 trillion.)
Stressing its cross-border focus outside the U.S., which includes providing services to other custodians, Citibank says it has on-the-ground presence through 50 custody offices. Its global custody assets grew over the 12 months by $77 billion, or 2.6 percent.
Jaffee asserts that recent trends like globalization and cross-border trading play to Citibank’s “unique strength , one that, as investors come out of their home markets and focus on global investing, they appreciate.”
Citi’s asset growth has been coming mainly from institutional investors rather than other custodian banks. Pursuing U.S. mutual funds as they, too, expand overseas, Citi in July was appointed custodian of $7 billion in assets for the Invesco U.K. funds.
Europe is likely to drive the next wave of asset growth, whether internal or through acquisition, says Jürgen Marziniak, chief executive of global securities services at Deutsche Bank, No. 4 on the list. “There is nothing you can buy in the U.S. without spending a lot of money, so the music will play in Europe,” he explains.
A European bank made the one significant leap within the global custody top ten: BNP Paribas of France moves up from sixth to fifth, displacing State Street Corp. with a gain of more than $500 billion, to $1.18 trillion.
“We,ve been doing a lot of work in the last two to three years, putting in place a pan-European global custody and servicing proposition,” explains Peter Christmas, head of U.K. sales for European investor services with BNP’s securities unit. The effort has made BNP Paribas the sixth member of global custody,s informal trillion-dollar club. The next-closest player is Brown Brothers Harriman, at $596 billion.
While everyone’s keeping a close eye on Asia,s fledgling pension reform movement, Europe, particularly France and Germany, will fuel “dramatic growth in the assets that can be managed over the next three to four years,” predicts J.P. Morgan’s Swayne.
Adds Deutsche’s Marziniak, “Everyone is pushing into Europe, and the large global players will get the biggest piece of the cake.”
They might grab in any number of ways: by following U.S. asset managers abroad, as Citi did with Invesco; by acquiring smaller European custodians that lack the scale and resources to adjust to a cross-border world, as Bank of New York did in buying Royal Bank of Scotland Trust Bank in 1999; or by forming alliances, as Mellon Bank of the U.S. did with ABN Amro Bank of the Netherlands in 1998. Mellon Group, still the only sizable multinational alliance, maintains its No. 8 rank this year even though its global custody assets declined by $30 billion. (More than 80 percent of the alliance’s $2.8 trillion in custody assets are not cross-border.)
Most experts expect the biggest custodians to go head-to-head for market share by any means at their disposal. That includes broadening their offerings with accounting, pricing, distribution and shareholder services in hopes of attracting asset managers to more than basic back-office and settlement functions.
“It’s not a game of just gathering assets anymore,” says Jay Hooley, executive vice president of collective funds services at State Street. “Where we,re really starting to see the boom is in middle-office outsourcing, like shareholder recordkeeping,” Hooley adds.
The major custodians vow to develop and market services harder despite the downturn. J.P. Morgan now provides accounting for many clients, Swayne says, adding, “a few years ago that wasn,t the case.” To lead a similar push for new outsourcing opportunities, in April Citibank hired Thomas Abraham away from an investment banking post at Deutsche Bank in Japan to head a newly created investment advisory services group in London.
Diversification always helps in a downturn. With interest rates falling, banks like BoNY and State Street are profiting from securities lending, which offsets custody fee declines. But that can,t fully compensate for softness elsewhere in their businesses, so attention naturally turns to cost control.
“Those focused on strategic cost management will have less pain,” says Citi’s Jaffee. “Things don,t go up forever, and that can be a painful lesson.”
All figures for the survey are as of March 31, 2001. The custodians themselves provided the numbers in response to a questionnaire from II. Senior Editor Jane B. Kenney, aided by Assistant Editor Laura Witkin, oversaw this survey.
The Global Custody Ranking results are available in the Research & Rankings section of this site.
