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Impact Investing

IPE special report May 2018

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Citibank records record results in 2000

Like many custodians last year, Citibank’s worldwide securities services had a bumper year. With revenue growth up by 30% and profitability even more so, the group recorded its most successful year to date. So unsurprisingly, Robert Binney, managing director of the worldwide securities services division, is pleased: “We’ve seen a continuing growth in cross border investment which has been growing at 15% plus per annum for the last 5 five years and we’re gaining a share in a market that’s already growing quickly.”
Binney puts the prosperous year down to three phenomena. First of all, the 15% growth is driven by the OECD’s demographics. “We’re living longer and we know we need to save for our pensions and retirement. We’re augmenting our pensions, augmenting our insurance policies, buying our PEPs and our ISAs and putting money away in mutual funds and unit trusts. Collectively that’s a great deal of savings,” he says.
Since the Euro came into existence, currency risk associated with trades between countries within the Euroland has disappeared and this has boosted the industry. What was previously perceived as foreign investment is now, from a currency perspective, tantamount to domestic investment. Hence the surge in cross border investment in the eurozone. Last year Citibank’s security services outfit had a 30% growth in business in Europe compared with the 15% global average.
And this presents the larger custodians with a beautiful opportunity. “German investors, for example, are investing outside Germany and the moment that happens we get interested because, in general, their local bank is only good for domestic, German investments. Most German banks do not have a regional network. We do,” says Binney.
A third reason for the boom is the continuing consolidation in the industry. “Custodians are getting out of the business, the bigger boys are getting bigger and the smaller boys are either focusing on a niche or getting out of the business altogether,” says Binney. Although there were no large mergers, the consolidation was merely part of an ongoing process. “People know that the average British, French, Dutch, German and Italian bank is not really in the global custody business, they’re in the domestic custody business. Once you go overseas, you probably should start thinking about the major global custodians.”
In such a buoyant market, being successful may appear relatively easy but the drive for low margins and efficiency are as pressing as ever. Custodians are being pushed to provide additional securities services and to stand out from the others. According to Binney, nearly 90% of their trades now go straight through without any manual intervention. “We’ve worked very hard to get our clients straight through and we are very pleased because that means less manual intervention, less mistakes and more ability for us to pass on the economies of scale that come with an efficient, automated, process.”
Citibank’s extensive European network is another attractive attribute. “We are our own sub custodians in 51 markets around the world. If any client comes to us they don’t have to worry about who’s looking after their assets in country x or country y, it’s Citibank. The risk is less from the investors’ point of view, and they get consistency. Whether they are dealing in Madrid or in Frankfurt, they are getting an equivalent service to what they see in New York, London or Tokyo and that matters a lot,” he says.
Binney stresses that, rather than having just a marketing operation in London and Frankfurt, they have many people based in Europe. “In many ways we’re more European than even our biggest European competitor because, if you look at all our European competitors, they’re very strong in one country – their home country – and relatively weak everywhere else.”
Ironically, as Europe heads towards a single, financial Euro state, local custodians, with the odd exception, are beginning to withdraw and concentrate their energies locally while the larger, American custodians with hefty resources to back them appear to be clearing up. “Some of custodians like Barclays and Nat West saw the writing on the wall and got out and sold their business. Others – the major Swiss banks, Italian banks and French banks – have not really sold their business but recognised their limitations and said ‘we’re going to be an efficient processor domestically and then work with someone internationally’. They have a big domestic base and then subcontract to us or whomever in the other main markets.”
On the demand side, many are outsourcing administration and securities services. “Clients recognise more and more that they should focus on what they are good at and have someone else do the things they are less good at,” says Binney. Robeco’s decision to outsource to Citibank is a classic example of this.
Get Binney onto the issue of a central counterparty in Europe and he is resolute. “We think there should be one principal central counterparty in Europe, or at least one holding company in which the big counterparties in London, Paris and Frankfurt would operate. This is the first and single most important action necessary to get an integrated securities market in Europe.”
Creating a central counterparty is a political decision but Binney believes it will happen – and probably quicker than the merger of the two ICSDs or the major exchanges in Europe getting together – neither of which look too imminent. There are what he refers to as three axes – Paris, Frankfurt/Luxembourg and the Switzerland/Crest. “To believe they’ll all get together in some harmonious pan-European venture is cloud cuckoo land. The central counterparty stands a much greater chance of success,” he says.
As for Citibank’s European expansion, Binney says that they are relatively busy in Eastern Europe where they focus on Poland, Hungary and the Czech Republic. “There’s an emerging middle class that is beginning to have some of the same attributes that you’ve seen in western Europe for some time. We see these three countries being in the vanguard in Eastern Europe and hopefully others will follow.”
Poland is a particularly interesting market and the group recently bought and integrated Poland’s Bank Handlowy. Hungary has traditionally been an important market while the Czech market is somewhat smaller but, again one to keep an eye on. “We have high expectations for the future,” he says.
In continental Europe, pensions business is likely to be steady rather than remarkable in those countries with established schemes – the UK, Ireland, Switzerland, Holland and Denmark – growth beyond 7-8% per annum is unrealistic. “The great conundrum from a pensions point of view,” says Binney, “is that Germany, France and Italy have got relatively few pensions, if any, and the question is, when are they going to move on this.” Germany looks promising in Binney’s eyes. “We think it’s quite exciting. It looks like the German pension fund market will finally take off.”
In France, there’s likely to be no action before the general election next year and in Italy, the growth is likely to be in the big mutual fund industry: “They’re used to investing abroad because they have historically had a weak lira.”
Both Germany and France have large mutual fund industries but both prefer to invest their money locally whereas the Italians have tended to put it abroad. “In Germany that’s beginning to ease up now and they are beginning to invest more globally. The French investment funds still have a large predilection to invest back in French government paper or French equity so there is less opportunity for the likes of us to get involved because it stays in the French banking system.”
Even so, prospects for the larger custodians are pretty healthy in Europe. With turnover up 40% last year and cross border trades up 15%, and with no sign of levelling out, the beano continues. Or, as Binney sums it up: “Everyone acknowledges that this is a good industry to be in at the moment.”

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