A sign of things to come?
Although some may view it as a small ripple in a pretty big pool, the demise of Glasgow-based National Custodian Services UK
(NCS UK) – until recently known as Clydesdale Bank – confirms much of the current thinking of how the European custody business will shake out over the next few years.
While the National, a subsidiary of National Australia Bank (NAB), will continue to offer full range of custody and investment administration services in Australia and New Zealand, its withdrawal from the UK underlines once again not only the fiercely competitive nature of that market – which over the past five years has precipitated the exit of all the indigenous custodians, with the exception of HSBC – but also the bleak future now looming for other smaller, mono-market providers across the Continent.
With just £40bn (e60bn) under custody, NCS UK was indisputably a minnow, but it nonetheless had a number of things going for it. Number one, the bank (in its Clydesdale incarnation) had a 30-plus year record of providing trustee and depository services to the UK market, and while it did not enjoy a particularly high profile, it was no ‘Johnny come lately’ to the asset servicing scene. Number two, with Clydesdale having been acquired by NAB back in 1987, NCS UK had a major institution standing behind it, a qualification which in recent years – particularly with the new Basel II capital adequacy requirements looming – is coming to be seen a determining factor as to the longer-term viability of custodians in Europe.
Having been content to run the business as an independent entity for many years, in 1998 NAB chose to globalise its lines of business – custody included. That decision saw Tony O’Grady, National’s then general manager for global securities services, take on responsibility for operations in the UK as well as Australia and New Zealand. O’Grady’s brief was to push the bank into as yet unexplored territory, starting with subcustody. It then moved into the fund administration space as well as offering a range of ancillary services.
Soon enough Clydesdale had been appointed UK subcustodian for both Brown Brothers Harriman (BBH) and Mellon – worth £2bn and £35bn respectively, these mandates not only gave the bank a degree of critical mass but, just as important, valuable credibility. In late 2001, a new master custody product was unveiled which sought to combine the various attributes of NAB’s existing Australian offering with a highly-regarded IT platform customised for the UK. Supplied by Massachusetts-based investment management solutions provider Eagle Investment Systems – now owned by Mellon Financial – the new platform offered centralised processing and support for a wide range of trading, custody, analytical, accounting and performance information flows.
“We will be looking to the 250 clients that we have serviced for many, many years in Australia with a view to extending to the UK what we have achieved for them in Australia and New Zealand,” noted O’Grady at the time. NCS also planned to target “the relatively smaller players”, in particular smaller pension funds and managers of between £100m and £1bn in size, perhaps in Scotland where it already had an established client base.
O’Grady was keenly aware of the credibility issues inherent in moving into new market segments at such a late stage, but he felt that NCS’s commitment in terms of locally aligned technology, and ongoing investment in that technology, would help counter any scepticism. He also felt the sophisticated nature of the National’s ‘home’ market, Australia, would stand it in good stead.
Well, as we now know, the ‘big push’ didn’t pan out. Speaking to IPE shortly after the exit announcement, head of NCS UK Ray Lester was philosophical, if clearly dejected. “Things have changed, and we have got to move with the times,” he said. “There was no question that back in 2001 we needed to diversify in order to reduce the operating risk in the business, as we were overly reliant on a number of large clients. However, we were really hit hard by the subsequent bear market – fee revenue was already on an ad valorem basis, volumes were down due to the market condition and on top of that competition was increasing for what few mandates were out there.
“So whereas originally we had been confident that there was a niche in which we could operate as a smaller provider quite comfortably, suddenly we found that the big players were going for all and every piece of business that was coming up,” Lester continues. “The bottom line is they effectively compete on fees, which we saw slashed to a half or even a third of what they were, and that of course completely changes the economics of the business. As margins get smaller and smaller, you obviously increasingly need to be a scale provider, and that is where the market is gone – and where it is going still further.”
In the meantime, NCS UK had lost Mellon as a client: “They took a strategic decision that they wanted to manufacture their own custody here in the UK.” The relationship was severed in April 2003, although the arrangement with BBH continued to the final curtain. It, along with other NCS UK clients, will now have the option to transfer across to The Bank of New York, which already has a relationship with NAB, having handled its global custody needs in Australia and New Zealand for the past seven years.
That transition of assets expected to take place over the next six months. Whether we see other custodians quitting the business in other European markets during that timeframe remains to be seen, but it is clearer than ever that such exits will come sooner or later.