Global players home in
There is an air of eager anticipation among global custodians when it comes to providing services in central and eastern Europe. Interest in the region has been steadily building over the past few years and the accession of countries including Poland, Hungary, Slovakia and the Czech Republic to the EU in 2004, has generated a boom in the amounts of assets under custody.
“All of the major custodians have been involved in the central and
eastern European region since around 1995, but it is only in the past two years that real interest has been shown by clients,” says Tomasz Smilowicz, global transaction services head, Czech Republic at Citigroup Transaction Services. “Custodians have all increased their activities significantly over this time. This interest has been driven by the extremely dynamic growth of assets under custody of our clients in all markets, but particularly the Czech Republic, Poland and Hungary.”
Stefan Gmuer, managing director and head of State Street’s investor services business in Germany, says the accession into the EU and the adoption of the euro will give these countries a significant push towards wealth.
Talk to any custodian about the region and “potential” is an oft-used word. Poland attracts the greatest interest because it has a population of around 40 million. Gmuer’s colleague, Joerg Ambrosius, head of sales and account management, says the demographics of Poland and because many of its people are becoming wealthier makes it an interesting market.
Benjie Fraser, managing director of Bank of New York (BNY), based in London, says because of the size of its population Poland dwarfs the other EU accession countries. That is why there is so much focus on Poland from securities services providers, he says.
There are differences to be found in countries across the region, he points up. Some are growing aggressively and others less so. “The massive inflows into the Baltic region as a result of the radical reforms they have made is also making this an attractive market for our clients,” he says.
Market reform will be the next catalyst for countries in the region after EU membership. Fraser says BNY anticipates that reforms to pensions regulations will lead to opportunities for custodians to go after bigger pools of assets.
Gmuer agrees: “The accession into the EU and the adoption of the euro will give these countries a significant push towards wealth. Combined with aspects of pension reforms that have to kick in in all of these countries, the need to standardise these investment types will accelerate.”
Harry Devroe, director of securities services, central and Eastern Europe at ING Wholesale Banking/Securities Services, says regulations are in the pipeline to ease foreign investment restrictions for pension funds. “Several years ago I was in Prague and at that time only 10% of pension funds could be invested outside the country. Now it is around 40%. In Poland, funds can invest only 5% of assets outside the country; the rest must be in Polish paper or other instruments. We are expecting these things to change with legislation.”
Recent pension reforms in the Baltic states have “huge” mid to long-term potential for all global custodians, says Ambrosius. “These countries will have fully funded pension schemes, which are currently at a low level but are experiencing rapid growth rates.”
Growth is a major theme in the region. Ingrid Reichmann-Kops, director of marketing and sales at ING Wholesale Banking/Securities Services, says in the first nine months of 2005, assets under custody increased by 66% across the board in eastern and central Europe. Among ING’s markets Russia has the largest amount of assets followed by Poland, Hungary, Czech Republic and Ukraine. “Other countries in the region have smaller markets, but are becoming more active. Bulgaria and Romania, as they move towards EU accession in 2007 are seeing an increase in activity, which happened before the other countries joined the EU,” she says.
Gmuer says custodians operating in the region need to be ready to absorb the growth levels expected, as well as be able to offer the right products. Throughout the region at the moment there are certain restrictions on local currency and investment abroad. Internationalisation of the market will change investment patterns for private and institutional investors – a trend seen for some years across the world. The search for alpha will have these countries looking to diversify and State Street is ready to absorb that growth, he says.
Many custodians deem a local presence important. ING Securities Services operates in eight countries – Poland, Hungary, Czech Republic, Slovakia, Bulgaria, Romania, Ukraine and Russia (in 2002 it took over the securities services business of CSFB in Moscow). “We have a local presence in all these countries and that is very important. There are significant differences between these countries and unless you have an office in the country you cannot cope with all of the regulations and differences,” says Reichmann-Kops.
State Street also sees the wisdom in establishing offices across the region. “Over the past few years State Street has been expanding its presence in continental Europe and we are closely looking at opportunities in some of the eastern European countries,” says Gmuer. “Our strategy isn’t to provide global custody from one central point, we believe it is also important to build a bricks and mortar presence in order to be able to offer depot bank services where local regulations require a presence, such as in Poland.”
Citigroup this year opened an office in Slovakia in response to requests from clients. “This shows that even a relatively small market such as Slovakia is becoming an area of interest for the global investment players,” says Smilowicz.
In terms of the services clients want, Gmuer says financial institutions and corporates in central and eastern Europe are at the stage that the rest of Europe was operating under 10 years ago. “The services they require tend to be not as sophisticated as other European institutions that typically need bundled solution such as global
custody combined with securities
lending and performance measurement,” he says.
However, Citigroup’s experience is different. Says Smilowicz “As a consequence of the increased volumes in the market, we are seeing greater demand for securities lending. In the Czech Republic there is more demand for borrowing than for lending. This requires us to educate market participants about securities lending – which is a relatively new product in this market – and also to seek out counterparties who can lend securities.”
He adds that an increasing number of global players are treating central and eastern Europe as a single region and want one securities services provider across all of the different countries. “That is one of the reasons we opened the Slovakia office so we could ensure our clients that they can deal with Citigroup for all of the different countries and not have to go to someone else.”