Aiming to be number one
According to Stefan Staub, head of Global Investment Reporting at Credit Suisse Asset Management, growth in Credit Suisse Group’s custody business has been tremendous in the past few years. At the close of last year worldwide assets topped $1,680bn (e1,971bn) of which $605bn were in European equities and fixed income and a further $404bn in Eurobonds. Growth of the custody business has been driven by new clients and by mergers and acquisitions.
Due to the international exposure of Swiss private banking, custody issues were always at the top of the agenda of the management of Swiss banks. To satisfy the needs of its international clientele Credit Suisse was obliged for decades to develop its custody business. According to Staub, Credit Suisse’s recent acquisition of Donaldson, Lufkin & Jenrette (DLJ) strengthens its strategic position in Investment Banking as well as in Asset Management in the US. Another benefit of the acquisiton is that Credit Suisse can buy into the custodian Pershing which is part of DLJ. Staub believes the acquisiton will enable specialists to reshape the business to benefit both offshore and institutional clients.
“The deal adds to the volume of assets under custody in North America which, in a business that is driven by economies of scale, helps to lower costs,” says Staub. The acquisition means the group will benefit from DLJ’s network that it has built up with Pershing in the US and Staub hopes that they are able to adapt the US know-how to the European style of thinking.
And here there is a difference. “In the Anglo Saxon world you have a split between the investment banking – M & A, asset management andbrokerage – and the commercial banking side. When one speaks about custody from a US organisation’s point of view, you always hear the argument that the two fields of custody and asset management don’t go together as there must be a clear distinction.” In central Europe, Staub says, this is not seen as a problem because the central European banks are organised as true universal banks.
This has apparently become a bit of an issue since American custodians like Chase, State Street and Citigroup are players in the field as well and they want to make the point. “Due to the fact that the asset management activity has become more of a core activity, it was helpful to the American organisations in Switzerland to make the point that one should distinguish between these two fields,” he says. Before the concept of global custody came about there was no split in Swiss banks. But at the beginning of 1997, Credit Suisse introduced business units. Each unit focuses on a particular core activity for example, commercial banking or asset management/ other without forgetting the benefits of the old, universal bank system. Still, Staub says it’s essential to reassure clients there are clear Chinese walls between the departments. “We have to provide a clear understanding that there is no chance for an asset manager to see competitors’ data.”
Staub says they present their basic global custody services to prospective clients as the cornerstone of a global custody solution and in explaining it, liken it to building a house. Forming the foundation of the hypothetical house are the basic custody services of safekeeping and administration, settlement, delivery and the reclamation of withholding tax. On top of this they offer reporting, online tools, securities accounting, securities lending and cash management. Earlier this year they began offering compliance monitoring as Swiss institutional clients are restricted by law to invest certain amounts in specific categories. “Obviously they do not want to go over these guidelines and they do want to have, on an online basis, the possibility to check to see, for example, if their manager is complying with the benchmarks,” he says.
Faced with the different services, individual clients can pick and choose to produce a tailor-made service. According to Staub, Credit Suisse is able to provide superior specialised services in each of these areas, thus enabling a client to design a package giving them a controlled and concise investment view and a possibility to maximise opportunities to earn additional income and arrange for a suitable administration process. Staub says the client can achieve account transparency, can analyse their investment portfolio thoroughly and can make informed decisions about investment strategy and asset allocation.
Growth in custodial business has a knock on effect into other custody-related areas including brokerage, advisory, asset management, securities lending and reporting. Another area of growth is that of high net worth individuals. Staub says that they have been providing custody for individuals for a long time and this gives the group an edge over its competitors. Many of the smaller, niche products on offer at Credit Suisse have been developed with individuals in mind. And, although American institutions initiated the concept of global custody, Staub says Credit Suisse had been providing exactly the same, only under another guise. “In Switzerland we dealt with even more complicated questions years ago. It was just not known as global custody but the needs of the clients were exactly the same” As a result, when the group began marketing their global custody, it brought all its previous services on offer together and offered it as a package.
Staub says it was never the group’s aim to offer plain vanilla custody-solutions but to add value. The group is therefore not primarily interested in volume but in quality which and Staub considers this to be the prime reason for its success. Most recently, new clients include institutions such as the pension funds of Federal Finance Administration and Swiss Federal Railway.
Such a strategy has obviously been successful and the group is expanding its business in Europe and, as a means to this end, various units- Credit Suisse Asset Management, Credit Suisse Private Banking and Credit Suisse Personal Finance, are working together. Staub says the strategy is twofold. First, it is trying to boost its business outside of Switzerland and build its share in the offshore market for private and institutional clients and the second prong is to build its market share in the major European markets including Italy, Germany, France and Spain.
Much of the latter will come from pension reform in continental Europe. Says Staub: “Compared to Switzerland, many of our neighbours have to catch up in establishing pension schemes.” He sees tremendous potential for an increase in assets in the German, Italian and French markets with Germany singled out as particularly exciting. Germany is on the brink of introducing funded schemes and legislation is awaiting ratification in parliament. Switzerland has one of the world’s largest SwF450bn second pillar market, makes it about the fourth largest at the moment. Germany at the moment has about 200bn, but Staub believes there’s great potential. “If this reforms comes as we foresee it, then the German second pillar will be a very interesting market,” says Staub. “If the Rentenreform in Germany gets under way as planned we are convinced we will see a strong demand for outstanding custody services in Germany for both institutional and private clients. Credit Suisse wants to be there as soon as this process is set in motion,” he says.
Earlier this year, Credit Suisse invented the concept of functioning as what it calls a “transaction bank” targeting smaller Swiss banks. Credit Suisse has reshaped its own custody administration and, having invested millions of Swiss Francs in its own IT systems, is in a position to offer its services to smaller banks for whom handling all the IT costs is rather a burden. Credit Suisse is still putting the system and services together but Staub is confident that by leveraging the group’s expertise and know how, smaller Swiss banks wanting to bring down their IT and staff costs could benefit from the group’s economies of scale
As for the future, Staub says there will undoubtedly be further consolidation in the industry in Europe. Such consolidation though is not driven by the need to consolidate custody services but by a bank’s need to consolidate its position or become number one in the market. Staub says CSG aims to become one of the five largest players in the market. That European stock exchanges need a common platform to increase efficiency in execution and settlement will shape the future of custody. “In our view, this transition process will be at the forefront of reshaping the custody industry in Europe,” he says.