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The contenders & Pretenders
"It has been a tough two years for many asset managers," observes the head of global custody at a large US bank. The suggestion is that while investment managers could forget about operational shortcomings while they were reaping the harvest of a decade long equity bull market, with margins under pressure they suddenly care about the state of their back and middle offices.
For global custodians that is both good and bad news. On the plus side, it means a continuation of the trend for outsourcing various elements of fund managers' operations. But it also means that customers are becoming much more demanding in terms of the services they're receiving from global custodians. Asset managers weren't the only ones who could afford to relax a little during the late 1990s.
At the top of Banking 2000's annual survey, a new name knocks Brown Brothers Harriman off its perch. Investors Bank & Trust scores a notable first in topping the ranking for best global custodian in both the weighted and unweighted categories. Investors Bank may still be firmly in the ranks of the niche providers, with only $831 billion in assets under custody, but in capturing the outsourcing contract for the whole of Barclays Global Investors' US business, it has proved that it can service the biggest asset managers.
Nevertheless, Investors Bank doesn't secure the highest referral rate from its clients. That accolade goes to Mellon Bank, which can boast that an impressive 85.33% of its customers would recommend it to others. Mellon continues to make significant strides in its global custody business, as witnessed by its continued rise up the overall ranking, this year securing fourth position in the unweighted table. As a mid-sized global custodian, Mellon appears to be achieving the best of both worlds, offering an above-average quality of client service - usually the preserve of the committed niche players - while at the same time achieving some of the economies of scale that the largest custodians enjoy.
The referral figures are an interesting addition to this year's survey. It is notable that the bulge bracket players - Bank of New York, JP Morgan and State Street - have some of the lowest ratings.
Of the three, it appears that State Street is faring the best. It ranks second overall in the weighted results, and for every one of its clients that suggests its service has deteriorated, three feel it has improved. The bank's head of global custody, Ron Logue, says it has made a particular effort to improve its European services in the past year, aiming to bring them up to the same standard of consistency as its US service.
However, any improvement has yet to be reflected in the regional results, with State Street still lagging Northern Trust and JP Morgan in the European pecking order, when results are weighted by assets.
Europe is undoubtedly the bright spot for JP Morgan. It sweeps the board in the weighted results for the region, and scores considerably higher than second placed Northern Trust, which appears to have fallen off the pace a little during 2001.
JP Morgan is likely to be less happy with its client satisfaction measures. Higher proportions of its customers have seen deterioration in its service than for any other custodian, with one-in-five having witnessed a decline in performance.
On the flip side, the fact that nearly 30% of its clients have seen an improvement in service levels suggests that JP Morgan's approach of tiering its service according to explicit client agreements is being noticed. In effect, the bank is saying emphatically that one size doesn't fit all, and if you're not willing to pay for the made-to-measure option, then you're going to get something that doesn't fit so snugly.
According to global head of investor services, Tom Swayne: "Certain clients opt for a less intensive service model, and that's what they'll get. They have every opportunity to say if we're ahead or behind in terms of what we're offering. We assess our service on a quarterly basis, and have a service level agreement to the letter of what is agreed with clients." Swayne also suggests that a comparison of service levels across the industry is increasingly meaningless. "The idea that everyone looks the same no longer applies. It's becoming increasingly difficult to compare apples with apples. I don't compare our business to a niche player." Which is just as well, given the bank's performance in the client service categories.
After last year's dismal performance, it seems the Bank of New York is starting to claw its way back. It has hardly seen a dramatic turnaround, but any sign of improving fortunes will no doubt be gratefully received. It still has the lowest proportion of customers who would refer it to other investors (50%), but at least more clients are now seeing improvements rather than deterioration in its service.
The real story, however, is found elsewhere. At the foot of the overall unweighted ranking sits Deutsche Bank, having dropped three places from last year's 10th position. What initially appears simply an abject performance in a year when it has suffered a number of set backs, unravels to reveal a more telling tale.
On April 29, in delivering the bank's first quarter results, Rolf Breuer, spokesperson for board of managing directors, revealed that the bank's custody business might well be up for sale. "Deutsche Bank is currently exploring strategic alternatives with regard to major parts of its securities services business," said Breuer's conveniently vague statement. A Frankfurt-based spokesperson for Deutsche Bank explains that it is likely to mean either a complete sell-off of the securities services business, or a move to establish a strategic partnership with another global custodian. "Deutsche hasn't drilled down as to what this means, but at the moment it looks as if it is most likely to sell it off," he adds.
Not since 1999, when Royal Bank of Scotland sold up to Bank of New York and Deutsche itself merged with Bankers Trust, has there been a notable exit from the global custody business.
A retreat by Deutsche Bank would be no small event. It is Europe's biggest global custodian and the fourth largest player in the world. What it is not, is committed to the global custody business.
The bank's spokesperson admits that it has recognized that there are more specialized global custody players in the market that can make money through greater volumes than Deutsche Bank possesses. "Custody is not considered core to Deutsche and this is now a business area that it wants to get out of," he says.
The question now is whether the bank will be looking to make a full or partial withdrawal from securities services. It is telling that Breuer's statement made reference to reviewing "parts" of the business. It is likely to want to keep its in-house operation and possibly its German book of business, maybe selling off its global and sub-custody operations. "Deutsche doesn't need to be a global custodian. In fact I doubt if it could ever have seriously called itself one," comments a rival custodian. "It makes clear sense for it to sell off its global operation."
Observers suggest that the bank may also end up keeping its European fund administration business. Head of the custody services, Paul McNaughton, comes from a fund administration background and as one onlooker comments: "Given the choice as to what part of the business to keep and what to sell off, it isn't difficult to see that he'd keep what he knows best."
There are a number of potential buyers for part, or all, of Deutsche Bank's business. The consensus seems to be that the German bank will not want to sell out to one of the bigger players. "Deutsche does not want to feed a major competitor, therefore the potential buyers will come from a very limited audience," says one commentator. "I could see them doing something with HSBC, BNP Paribas or possibly Clydesdale Bank."
However, one cannot rule BoNY out of the running. In commenting on this year's survey results, Clive Gande, managing director at BoNY, refuses to rule out the possibility of the bank making an acquisition, and it would clearly like to build a greater presence in continental Europe.
Of the smaller players, a spokesperson for Clydesdale Bank admits that the Deutsche Bank sell-off could present a strategic opportunity and admits that Clydesdale is watching the situation with "strong interest." However, he declines to confirm whether Clydesdale is in talks with the German bank.
Taking on any significant part of Deutsche Bank's business would be a considerable undertaking for Clydesdale, despite having the backing of National Australia Bank. With only EUR90 billion in assets under custody, nearly all in the UK, it is one of the market's minnows.
A deal may be more likely with HSBC. Buying the Deutsche Bank book could afford the UK's only remaining global custodian with the opportunity to move into mainland Europe. But would HSBC be willing to risk upsetting its existing customer base in an effort to expand? A spokesperson close to the bank isn't convinced: "An acquisition could aggravate customers, cause them to sit up and think what this meant for their overall quality of service."
That leaves BNP Paribas. It is arguably the most ambitious bank in the European custody arena, and Jacques Phillip Marson, head of BNP Paribas' securities services, has been urging it forward for some time. Deutsche Bank's book would certainly take it a long way very quickly. Much is likely to depend on whether it is successful in bidding for Cogent, the fund administration and outsourcing platform being sold by Australia's AMP. If it ends up buying Cogent, then a deal with Deutsche Bank would look very ambitious. BNP Paribas declines to comment on the situation.
Deutsche Bank's motivations for exiting the global custody business are clear. As a rival custodian observes: "Deutsche has bigger fish to fry." Breuer emphasizes that: "Deutsche Bank is in the process of increasing its focus on its core businesses: corporate banking and securities, cash management and trade finance, private and business clients, private wealth management, asset management and corporate finance." No room there for securities services.
This is something of a turnaround for the bank, which in the wake of its 1999 merger with Bankers Trust had seemed intent on building a custody business to challenge the bulge players. At the end of 2000 global securities services became part of the transaction bank business, within the corporate and institutional bank. The reorganization also brought representation for GSS on the executive board. Staff claimed it demonstrated the significance of the custody operation within the bank.
It was the Bankers Trust deal that really gave Deutsche Bank the potential to be a big player on the global stage. BT brought $2 trillion in assets under custody and 1200 clients to supplement Deutsche Bank's own $1.5 trillion in custody assets and 4000 clients. It was a big deal that was never going to proceed without hiccups. But with the right commitment and support, one cannot doubt that Deutsche Bank would have been capable of building a world class securities services business in the same manner in which it created an investment banking unit to challenge the bulge bracket players on Wall Street. Individuals close to the merger suggest that a lack of support from the bank bred frustration, creating a merger that was based on extremely weak foundations.
On paper BT and Deutsche Bank looked a perfect fit. The German bank had a strong internal and domestic mandate while BT brought a strong client base among US and UK asset managers. Significantly, Deutsche Bank failed to hold on to many former BT staff.
The highest profile departure was that of Mary Cirillio, an ex-BT banker brought in as head of global institutional services who left "to pursue other opportunities," allegedly with a sizeable cheque in hand.
Two months after her departure, the bank turned to Jürgen Marziniak, a former employee who had left in 1997 to head Clearstream. Marziniak brought in high-profile figures such as Terry McCaughey and Richard Ernesti, and it seemed as if Deutsche Bank was committed to building a new-look business.
That all three left the firm within a year indicates that the bank was a lot less committed than they had hoped. "McCaughey and Marziniak are strategists," says a source. "Deutsche didn't support their vision for the operation and gave them no option but to leave."
Nor have they been the last senior figures to leave. In late March Stefan Gmuer, head of customer management in Europe and seen as a future head of the custody division, unexpectedly quit, and is expected to take up a post at State Street alongside Joerg Ambrosius, another former Deutsche Banker.
The latest refugees are a dozen or so members of the securities lending team, led by Tim Smollen, who along with their boss have jumped ship to Dresdner Bank. Understandably, Deutsche Bank is keen to play down their departure, saying that it has no material impact on their ability to conduct business.
A number of global custodians told Banking 2000 that the German bank was touting its US book of business around the market at the end of last year. Another source close to the bank says that the operation had a net loss of around $250 million last year. "It was just a matter of time before resources dried up and the decision was taken to get out of the business," he adds. Deutsche Bank declines to comment on either point
In truth, few in the industry will be entirely surprised if Deutsche Bank ends up exiting the fray. The signs of an imminent scaling back of operations have been there for some months.
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