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Asian Custodians Expand Services, Geographic Reach
October 1, 2007
Custodian banks have historically focused on the business of safeguarding assets for their clients. In recent years, however, clients have asked custodians to offer a variety of complex securities services, ranging from financial accounting to management of failed trades and beyond. In Asia, demand for such services is expected to keep pace with the region's growing capital markets.
Every large custodian in Asia-Pacific has tested strategies for entering the relatively mature markets in the region and adapting to the local regulations. Much diversity remains, however, in the way that custody services are offered in Asia. Multinational custodian banks dominate the Australian market, while domestic banks tend to be the first choice of provider in Japan. In markets such as Hong Kong, global custodians work with regional partners.
According to the Investment Company Institute (ICI), a U.S.-based trade association for the mutual fund industry, Australia is the fourth-largest managed funds market in the world. Custodian banks find it particularly lucrative because of its government-mandated retirement contribution program, which ensures a steady inflow of money. JP Morgan Worldwide Securities Services, for one, has made Australia its headquarters in Asia-Pacific for client reporting, trade processing and client service.
"Because the Australian growth story is so compelling, the local market is currently overserviced, with considerably more custodians than the market size warrants," says Bradley Kelly, VP and product and strategy manager at JP Morgan Worldwide Securities Services in Australia. "Consolidation is inevitable and has been the topic of discussion for some time, but we have yet to see any real movement." That is due in large part to "the attractiveness of the market," adds Kelly. "It's a brave decision for a financial institution to decide they don't want to compete for a piece of the Australian market."
Australia's is a mature market in a developing region. The local investment management community is extremely active and the country is on the cutting edge of financial product creation.
According to Kelly, the primary fuel for custodian banks' growth has been the Superannuation Guarantee Administration Act of 1992, which requires that 9 percent of annual income by paid into a retirement account. The Australian Bureau of Statistics says that as of March managed funds institutions have $937 billion in total assets and have seen 16 consecutive quarters of growth.
To compete in this environment, custodian banks have begun to offer value-added services. "The custodian is more often than not viewed as a value-added business partner, coveting a much closer relationship with the investment manager than thought possible a decade ago," says Kelly. "As asset gatherers are looking to focus on their core capabilities of managing people's money, they are increasingly looking to a custodian bank to manage their middle office."
Custody assets under management grew by 12 percent in 2006, to $953 billion Australian ($802 billion), according to the Australian Custodial Services Association. "In this industry, size and scale are the ingredients for longevity and success," notes Kelly. "The industry is extremely capital intensive--so much so that only the very biggest global custodians will be standing when the music stops."
Domestic custodians will find it increasingly difficult to compete, he says, as customers look for global capabilities and scale. Local custody banks "may be faced with the prospect of becoming boutique players, which is a difficult position to sustain, given the margin pressure facing the industry and the ongoing need for capability development and investment," says Kelly. "Inevitably, some may have no choice but to exit the industry altogether."
