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Impact Investing

IPE special report May 2018

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Deutsche at the crossroads Richard Greensted: 'Speaking my mind'

Is Deutsche serious? That is one of the hotter questions currently circulating in the salons of leading global custodians.
In anticipation of its acquisition of Bankers Trust (BT), which has a strong custody business in Europe, observers are starting to wonder if Deutsche Bank can build a European custody powerhouse to challenge the Americans. The short answer appears to be: 'Maybe'. It was instructive to note how quickly Deutsche's senior managers, from chairman Rolf Breuer downwards, professed their commitment to European custody after they had announced the deal with BT, but cynics suggest that they had little alternative and were simply keeping their options open. A more generous view would be that the custody business - especially when combined with BT's assets - looks very attractive to those managers, who remain committed to relationship banking even as they try and build a global investment bank driven primarily by deals. Relationships don't come any stronger than those forged between an investor and its custodian, such are the intricacies of the business. Although Deutsche has long been regarded as an underperformer in the custody business, it has quietly built a fairly impressive infrastructure on which it could base the combined European operation. At the end of 1998, Deutsche had total assets under custody of $1.6trn (E1.4trn), of which $1.4trn were European. That makes it by far the largest European custodian; additionally, it is in the top five of global custodians when measured by market share of cross-border assets under custody, of which it has about $800bn. It claims to have more than 4,000 institutional clients, split evenly between banks and broker/dealers and institutional investors. More than two-thirds of those clients are European. Deutsche also has a nascent sub-custody business. It holds over 90% of client assets in-house - that is, in its own branches - and now has a sub-custodian network covering 90 markets. In 26 of these it has its own branch, and it has started to sell sub-custody services to other global custodians. So far, it has made most headway in Asia Pacific, where it aims to become the second-ranked provider in terms of market share and profitability; it also has ambitious plans in Central and Eastern Europe and Latin America. This strategy is difficult to fault, as there is limited competition from other global banks - apart from Citi. But Deutsche's ambitions are not limited to the sub-custody market. Through 'acquisition and aggressive organic growth', it aims for global leadership in investor services and a top three position in the custody rankings by 2001. Even with the current asset growth rate of 34%, that is going to be quite a stretch. BT has assets of about $2.3trn, which would take the combined holdings to just short of $4trn, but that makes no allowance for the attritional losses which would inevitably occur after the deal had closed.
The leading three custodians - Chase, Bank of New York and State Street - all hover at around $5trn. Deutsche would therefore have to add at least $1trn of net new assets in two years, whilst simultaneously getting to grips with integration of the two operations. As yet, Deutsche doesn't have the required list of unique selling propositions that will enable it to achieve such enormous growth. Outside Germany it is little more than a standard supplier of core custody services, unable to provide many of the value-added fund administration and accounting products which buyers increasingly demand. If you're looking for a safe, reliable safekeeping and settlement house, Deutsche fits the bill - but the majority of large funds require much more than that. BT has the potential to help it enormously with its range of value-added services, especially those offered by The WM Company, the performance measurement and fund accounting business, out of Edinburgh. The drawback here is that WM is not in rude health, and needs a huge investment of time, people and money to revive it. It hardly looks like a business capable of delivering such sparkling asset growth for Deutsche. That said, there is room for optimism about Deutsche's custody plans. It is expected that Mary Cirillo, the highly regarded current head of BT's global asset services division, will end up running the combined custody shop. This appointment should be greeted positively by clients, staff and consultants, as BT is widely perceived to be the senior partner in this particular field. Additionally, European investors may feel substantially more comfortable about doing business with a European bank which has in-house American expertise at its disposal. Up until now, Deutsche has lacked the franchise to pitch for custody and accounting mandates in many countries outside Germany - over the next two years, however, all that could change. If Deutsche is genuine in its protestations of love for the business, and it appoints the right managers to run it, we may yet see the first European to give the Americans a run for their money.

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