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Mercer sees one more mega custody merger

EUROPE – The securities services industry has “significant” scope to concentrate further – with another ‘mega-merger’ possible, a report by Mercer Securities has said.

Although the sector has not seen any major merger activity in around two years, Imran Gulamhuseinwala of consultants Mercer Oliver Wyman – which assisted Mercer Securities with the report – said there was “potentially space for one more custodian mega-merger”.

The sector’s last mega transaction can be dated back to 2002 when State Street bought Deutsche Bank’s Global Securities Services business for 1.5 billion dollars.

Gulamhuseinwala said he expected further acquisition within the mid-tier “as scale and scope become increasingly critical, forcing ambitious players to bulk up and the unambitious to exit. Sub-custody will concentrate further, mostly by straightforward exits.”

He added: “For the prime brokers, the skew in profitability between large and small players will result in the some small players exiting; and some of the mid-tier clearers are likely to become acquisition targets as the largest clearers try to build scale.”

The report further forecasts “strong growth” for the prime brokerage and correspondent clearing businesses, while core custody is facing “weakening” volume growth.

Custodian earnings are forecast to gain nine percent over the next year, which is well below the 30% growth figure seen over the past 12 months.

Mercer expects custodians to account for sales of roughly 18 billion dollars in 2004, of which prime brokers are likely to take a four billion-dollar chunk (excluding execution).

Securities clearers are expected to generate revenues worth four billion dollars, with derivatives clearers likely to capture sales of four billion dollars of which a billion dollars is directly attributable to clearing.

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