The recent merger of Credit Agricole Investor Services (CAIS) and IXIS Investor Services to create the rather clumsily monikered CACEIS - Credit Agricole Caisse d’Epargne Investor Services - should act as yet another reminder to the majority of Europe’s smaller, mono-market custody players that their days are numbered.
Europe is still deeply fragmented as far as asset servicing and post-trade processing is concerned due to a tangle of diverse, even contradictory, regulatory, legislative and tax environments. At the same time, providers must to reconcile the demands of an increasingly globalised clientbase for more sophisticated products and services with the relentless downward pressure on fees generated by the large global custodians determined to secure a slice of the European pie. For domestically focused banks with limited resources that presents a massive, even insurmountable, challenge.
Scale allied to a regional presence is now seen as the shape of things to come. Relationship, servicing and pricing advantages are seen to flow from using a single provider across multiple markets; and a regional footprint has come to be viewed as a statement in itself of a provider’s long-term commitment to the business. For those indigenous sub-custodians that have built their business model around servicing just the local custody, clearing and settlement needs of institutional investors and intermediaries, mergers or partnerships now look inevitable. While there will continue to be a limited demand from less geographically diversified or sophisticated clients for a ‘no frills’, locally-focused service, it will effectively be a niche activity that will not support multiple providers, as has trditionally been the case.
Bringing together CAIS and IXIS’s respective fund administration and corporate trust businesses and domestic, sub-custody and global custody operations, the creation of CACEIS can be seen as both a domestic market powerplay and a springboard for future expansion outside the partners’ home market. Michel Bois, formerly managing director of IXIS Investor Services and now managing director of the CACEIS management board, has described the structure of the new entity as “more open than a fully integrated structure” to allow for other partnerships to be developed. “We are ready to open our alliance to others at the local or the global level,” Bois noted recently.
Although he would not be drawn further, a merger with a regional or global custodian cannot be ruled out. However, other options perhaps look more likely. CAIS owns a 52% stake in the Fastnet fund administration business, a joint venture with Fortis Group; meanwhile IXIS has a joint custody venture in Spain with Banco Urquijo. CACEIS executives would only say that there are plans to expand into Spain, as well as extending the Fastnet operation to Dublin and Italy.

CAIS and IXIS were romantically linked for some three years prior to the merger announcement, and earlier this year the Royal Bank of Canada’s Global Services securities services operation and Luxembourg-based Dexia BIL, also decided to tie the knot after a protracted period of courtship. That deal saw the creation of a new entity – RBC Dexia Investor Services – headquartered in London and boasting some $1.8trn (e1.4trn)under custody, making it the eighth largest global custodian by worldwide assets.
With a local presence in 15 markets on four continents, the merged entity will offer custody, investment administration and transfer agency solutions as well as asset optimisation services for the back, middle and front offices of investment managers globally. Each organisation gains valuable capabilities, expertise and geographical presence they were previously lacking, and which would otherwise have been extremely expensive or even impossible to acquire through organic growth.
Although it involves a melding of North American and European sensibilities, on the face of it there appears to be a good cultural fit between the two camps, with both companies commitment to a client-centric, ‘high touch’ service ethos. In addition, the new organisation will undoubtedly benefit from being backed by large parent companies with strong reputations and credit ratings.
The well-regarded transfer agency capability offered by Dexia subsidiary FETA was clearly viewed by RBC as an important element of the deal; in the case of HSBC’s 2003 acquisition of the Bank of Bermuda, it was the latter’s clout in the hedge fund administration space that proved particularly attractive. A ‘multiple product’ acquisition that not only touched HSBC’s securities services unit but also its private and retail banking operations, the $1.3bn (e1.1bn) deal has given the bank added depth and scale globally; and, in Europe, particularly in Dublin and Luxembourg. With 1,100 institutional clients and some $113bn under administration, BoB’s Global Fund Services operation provided offshore trust, custody and administration services to the investment funds industry and – more crucially – was one of the world's largest hedge fund administrators with a number of processing locations.

The deal added scale and today in Europe HSBC enjoys a strong traditional and alternative asset servicing presence in the ‘offshore’ markets of Dublin, Luxembourg, the Channel Island and the Isle of Man, as well as in the UK, Germany and France. In addition, the bank has just opened an alternative fund servicing office in Italy and is now further broadening its strategy to encompass Switzerland, the Netherlands and the Nordics. HSBC had already undertaken a wide-ranging internal reorganisation prior to the takeover to ensure a more cohesive product offering: to this end, its wholesale businesses were brought closer to the corporate investment banking & markets to give clients easier access to credit, liquidity, distribution, trade finance and capital guarantee services.
Although things look bleak for mono-market players, they are not stuck with a wholly busted flush: the value of their relationships and ties within their market, allied to their deep understanding of local market practices, dynamics and regulations, means they hold a strong hand should they choose to come to the negotiating table. As Paul Stillabower, head of business development for HSBC Securities Services in Europe, notes: “If you look at foreign players in Europe, many have given up on trying to acquire local clients directly in favour of a more indirect approach via mergers and marketing partnerships – local banks clearly own the customers, and it is hard to lure them away.”
This thinking clearly informs the strategy adopted by The Bank of New York (BNY) – having spent the 1990s building scale through acquisition, over the past few years the bank has looked to partnerships as its primary route into Europe. Having initially linked up with Allied Irish Banks, BNY went on to form an alliance with ING Bank in the Netherlands; then, in January of this year, it entered into an arrangement with Natexis Banques Populaires in France. Under the terms of that deal, the US bank provides global custody services to e80bn of Natexis assets across 48 markets, while Natexis takes over as sub-custodian to a “large proportion” of BoNY’s French assets.
More was to come. In July, the bank formalised its existing relationship with BHF-BANK with the establishment of a jointly held subsidiary based in Frankfurt, offering depotbank services for German investment companies and ‘single window’ access to securities custody and settlement services. This was followed at the end of August by the announcement of a strategic agreement with Nordic custodian Nordea: BNY will offer global custody and related services to Nordea’s institutional clients in the Nordic and Baltic regions, as well as providing Nordea with technology and servicing infrastructure.
As the bank commented following the cooperation agreement with Natexis: “These European_countries can be difficult for outsiders to crack, and consequently we recognise the importance of strategic partnerships with big local players that extend our product or geographic reach – in that respect we believe we are more European than our US peers.” However, it remains to be seen if those US competitors decide that such alliances are indeed the way forward: at this point in time, most seem sceptical about the longer term viability of what one derided as this ‘oddball’ model.
A predictable response, perhaps, but of course neither are more traditional mergers and acquisitions always plain sailing. The integration of technologies, processes, staff, strategies and – just as importantly – cultures across multiple markets and product lines is itself fraught with pitfalls, and of course also takes considerable time. For all that, Europe will undoubtedly see more of them: barring any radical upheaval in the operating or regulatory environments within the region, in the longer term the business case for large and small providers alike is indeed compelling.