Securities Services
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A New World Order
Consolidation and expansion of services leave little room for smaller custodians
October 1, 2007
In the wake of a pair of mega-mergers earlier this year, the securities services industry is bracing for another wave of consolidation. Bank of New York Co.'s merger in July with Mellon Financial Corp. and State Street Corp.'s acquisition of Investors Financial Services Corp., completed last month, have left many asking what it will take for a custodian bank to remain competitive in the changing landscape and what will be the impact on their clients.
Such questions are indicative of the widening chasm between the top four custodian banks and the rest of the industry. And the answers will affect not only the operations and information technology groups at fund management companies, but also board-level executives who are increasingly being called upon to compare service providers.
In terms of size alone, Bank of New York Mellon is a force to be reckoned with. It is now the world's largest global custodian, with $20 trillion in safekeeping. JP Morgan Chase & Co. is next in line, with $15.2 million, followed by State Street Corp. at $14.9 million. Citigroup currently ranks fourth, with $11.3 trillion. The next rung--BNP Paribas Securities Services' $5.54 trillion (not including assets under administration) and HSBC Securities Services' $5.4 trillion--makes clear the distance the top four have put between themselves and their peers. Rounding out the top ten are Northern Trust Corp., Societe Generale Securities Services and Caceis Investor Services, which is jointly owned by Credit Agricole and Natixis.
Many industry observers see the shakeout in global custody precipitating further polarization between the titans and those seeking to increase their piece of the shrinking remainder. Some see increasing difficulties ahead for midsized custodians and niche providers that specialize in hedge fund or private equity administration.
Executives at a dozen custodian banks questioned by Securities Industry News agree that the next wave of consolidation is imminent but differ on where it will strike. Some speculate that mergers will occur among the five largest players; others foresee the largest providers continuing to snatch up specialists as was the case in Citigroup's purchase of Bisys Group's alternative fund administration operations, Northern Trust's acquisition of Baring Asset Management's financial services group and JP Morgan's pickup of Paloma Partners' middle- and back-office operations.
"A hostile takeover of one large bank by another is unlikely to occur," says Alan Greene, EVP of State Street in Boston. "However, I think it will become increasingly difficult for niche players to develop the scale and fund the technology infrastructure needed to survive."
Adapt or Exit
At the very least, say experts, banks that now provide custody as an add-on to existing services will find themselves in the same dilemma that U.K. custodians did in the 1990s: As markets and products become more complicated and technology-oriented banks will need to decide whether to make the necessary investments or exit the business. Many smaller, localized European banks have opted to exit the custody arena or to establish partnerships with larger financial institutions that have the deep pockets that allow them to keep pace with clients' evolving needs. Bank of New York Mellon, for example, has alliances with BHF-Bank in Germany and Nordea Bank in Scandinavia.
It may be too early to assess the impact that consolidation will have on customers, but the industry giants maintain they have the breadth of services--and resources--to accommodate the most diverse types of clients and investment strategies. "Consolidation helps our client base benefit from scale and efficiency," asserts Raj Shah, product executive for JP Morgan's global custody business.
