Sit down for a friendly chat with a custodian, and you’ll barely have had a chance to partake of the complementary coffee and biscuits (if indeed, given the industry’s post 9/11 belt-tightening, biscuits are still on offer) before the word ‘commitment’ is slapped down on the table like a big, wet fish.
Commitment to client service, commitment to technology, commitment to product innovation: the holy trinity of global securities services, a mantra without end, amen. All the more refreshing, then, when one of the world’s biggest custody players uses an announcement regarding its Q1 earnings to tell everyone – its no doubt less-than-thrilled clients amongst them – that perhaps it is not so committed to the business after all.
Deutsche Bank’s declaration that it is “exploring strategic alternatives with regard to major parts of its Securities Services and its Passive Asset Management businesses” comes as no surprise, however. Deutsche’s takeover of Bankers Trust (BT) in May 1999 was supposed to herald the creation of a true US-European powerhouse and usher in a bright new dawn for the continent’s biggest custodian. Instead, three years on, it is beginning to look suspiciously like the beginning of the end.
That acquisition saw the inauguration of the Global Institutional Services (GIS) division – comprising custody services, global cash management, investor services and corporate trust and agency services – headed by BT executive Mary Cirillo. Billed as a melding of Deutsche’s strengths on the continent – as a euro clearer, for instance – and BT’s innovative approach, GIS soon degenerated into a bloodbath as the two management teams battled for supremacy.
Having already seen the departure of Francis Jackson, who had come across from BT to become head of non-banking relationships and sales for EMEA, Stephen Soltis, Deutsche’s head of investor services and Cirillo’s second in command, resigned after losing control of the Bankers Trust index fund business. Then Roger Booth, head of custody services within GIS, also upped and left unexpectedly after just three months in the job. Finally, in February 2000, Cirillo herself was out the door.
She was replaced by Jürgen Marziniak, who had left Deutsche to join Luxembourg-based international depository Cedel International (now Clearstream) in 1998. Marziniak quickly brought in former colleague Terry McCaughey as chief operating officer for Europe, who prior to a stint at Clearstream had headed up Midland Securities Services (now HSBC GIS) for seven years, engineering the resurgence of what had been a deeply sick operation. Unfortunately, rather than providing a solid foundation on which to build and refocus the merged Deutsche-Bankers businesses, this seemingly promising partnership quickly foundered and by June 2001 McCaughey, too, was off for pastures new.
While all through this period Deutsche’s securities services operation continued to win business, it also suffered from a series of reorganisations and became increasingly marginalised, Marziniak with it. Sure enough, at the end of last year, Marziniak left Deutsche for a second time, re-emerging shortly afterwards as chief executive of GSTP AG, the company set up by the GSTPA to oversee the implementation of its global STP solution (a career move some might characterise as being of the ‘frying pan to fire’ variety).
Paul McNaughton was installed as global head of custody and fund services, but the defections continued. Stefan Gmuer, European head of customer management, global securities services, quit suddenly in March, while a sizeable chunk of Deutsche’s securities lending team – in the shape of Tim Smollen, David Martocci and Robert Boyd – were lured away to kickstart Dresdner Kleinwort Wasserstein’s new agency lending business.
So where now for the bank? It is understood that six senior executives – led by Juergen Fitschen, head of transaction banking, and including McNaughton and John Burgess, head of securities lending – have been charged with hammering out the answer to that question. Most expect the various regional businesses – US, Europe, Asia – to be sold off piecemeal. It seems certain that Deutsche will divest itself of the struggling US custody business it acquired through the Bankers Trust deal – State Street and Mellon have been touted as possible buyers, although with a long string of acquisitions already to its name The Bank of New York may also be tempted.
As for Europe, the picture is not quite so clear. Certainly the bank is in a stronger position on the Continent – it is amongst the largest fund administrators and providers of third-party services in Dublin and, through investment performance and administration consultancy The WM Company franchise, is also a significant player in the UK. It has been building up its third-party depotbank services in both Germany and Italy, while its existing depotbank facility in Luxembourg, which currently caters for group funds, is also being expanded to incorporate a third-party capability.
All of which makes it an attractive takeover target, particularly given how tough the US banks are finding it to break into the region’s key markets, not least Germany. That said, BNP Paribas – which recently bought its way into the UK market through its acquisition of Cogent, part of a wider strategy to establish itself as the European securities services powerhouse – must be seen as a prime candidate.
Of course, Deutsche’s senior management could find the matter is now effectively out of their hands. By revealing details of this operational review, the bank may have irrevocably weakened, or even broken, the bond of trust it has worked long and hard to establish with its clients. If those clients start to jump ship – and that must now be a very real possibility – then those executives may have little choice but to engineer a hasty sale while the business still has some value.