Putting down roots in Milan
The impact the Deutsche GSS acquisition is having on State Street’s presence in Europe is no more clearly evidenced than in its new office in Milan. As bank chairman David Spina put it recently it is transforming the business on this side of the Atlantic.
“The aim of the Deutchse buy was to give us local footprints across Europe,” says Jean-Marc Crépin, who runs the Milan operation. “Our strategy is to build a healthy client base in Italy, on top of what we already have.”
Deutsche’s global securities business in Italy was centred around three main business lines of a depository bank, being a “banca correspondente”, custody, both direct and global and securities lending. “The local custody stays with Deutsche, under the terms of our agreement, but the other business lines have moved to us.”
The depository activity relates to investment fund business, with responsibility for fund assets, looking after such areas as assets custody, prospectus control, and observing the range Bank of Italy controls, he points out. “Some aspects of the transfer agency function (TA) and the subscription and redemption, are involved.”
In Italy, the depository bank does not calculate the NAV usually, though a law change now allows the asset manager to outsource the calculation to a depository.
The ‘banca correspondente’ business is aimed at foreign investment funds authorised for retail sale in Italy. “This is clearly the TA function, but it is also a tax point, as the last one in the chain of money moving in and out of the country, it keeps the capital gains tax.”
Securities lending business is developing with the arrival of the European passport. “But you need to do your homework as to how you can assist the asset managers and insurance companies and other investors.” The asset managers are accustomed to securities lending, but insurance companies’ interest is more recent, especially as the regulator ISVAP is yet to pronounce itself in favour of lending. “While banks are clearly using it, pension funds and foundations have a much smaller involvement,” he says.
It is easy to forget that Italy is third largest domestic fund market in Europe with assets of €500bn in mutual funds. “Savings ratios are still high at 12 to 15% of disposable income.” As the banks largely control the arena as distribution is via the banks’ branches. The market is opening very slowly, with at least 70% of assets being managed by the banks that gather them. About €100bn is outside Italy in offshore funds, 70% in Luxembourg and 30% in Dublin.
The banks as managers buy the related custody services and this shapes the market, says Crépin, pointing to the key influence they have in the market. “Therefore selling global custody is very much like selling sub-custody services.”
The three largest banks have around a 50% funds market share. “As banks grow more sophisticated, they tend to steer away from global custody providers and enter the local custody world. In other words, they go with a local custody provider, as it gives them greater control. Then only use a global or regional custodian for parts of the assets.”
The pool of assets available to global custodians as a direct product could be “losing a bit of ground,” which is his view of the Italian and some other markets. “Global custody on its own is not going to go very far.”
The Deutsche business buy gives State Street that local edge in Italy, he maintains, for both the depository and correspondent business. “Our strategy is to approach all possible clients in banks, asset managers, insurance companies, pension funds and so on. But asset managers in particular are seen as a target as they can outsource their back office, and not just NAV calculation to either a third party provider or a depository.”
Most are still using internal systems and this could be the key to the market, in Crépin’s view. The outsourcing of technology arguments come into play: availing of the ability to leverage on third party supplier. “Costs can be huge just to incorporate tax changes into your systems.”
“Pensions have always been a hot topic in Italy, but little has materialised by way of assets in new schemes,” he points out. “Old schemes are worth €30bn, but have complex structures, often with high real estate content, making it difficult to outsource the servicing part.”
But he believes that “the market may now be ripe”. “The pensions reform is not as ‘hardcore’ as the market providers would wish.” He is optimistic that TFR will end up in the pension funds, even though this will not be compulsory. “The reforms will have their effect in three to five years.”
The operation has been set up as a branch of the German bank, with a depository license. “Our staff is now stands at 31, having grown by five this year,” says Crépin.