Land of opportunity for custodians
With a large base of unfunded pension liabilities, global custodians view the German market as one ripe with opportunity. In the past few years, all of the main global custodians have entered the German market, despite an oversupply of local depot banks.
“Depot bank and fund administration in Germany in the past have been a captive business of the big local banks and asset managers,” says Helmut Gottlieb, Citigroup Global Transaction Services head for Germany, Austria and Switzerland. “It is a very diversified market – there are around 70 depot banks in Germany and this is asking for consolidation. I think in the next five years there will be consolidation, because the investment required for platforms is too high to justify.”
Michelle Grundmann, manager for Germany at ABN Amro Mellon, says there is increasing consolidation across mandates in Germany. “We have seen a rise in requests to consolidate KAG and depot banks into one master KAG and one global custodian. That is a consistent trend and bodes well for global custodians and master KAGs.”
Master KAGs are peculiar to the German market, where investment advisers do not perform compliance checks or regulatory reports for their clients. Instead, each client appoints a master KAG to perform these functions.
Global custodians have been attracted by the large unfunded pension liabilities in Germany, Europe’s most populous country and one with a healthy savings mentality among its citizens. “Pension reform in Germany is trickling down through to the corporate sector and a lot of companies are moving to set up corporate trust arrangements (CTAs). If a global custodian can get in at the start and does a good job of servicing the CTA there is potential for very good revenue growth,” says Grundmann.
CTAs, which are external pension funds, are the favoured option for financing pension liabilities under new international accounting rules. In March, DekaBank, the asset management arm of Germany’s state-owned savings banks (Sparkassen), set up a CTA for €222m in pension liabilities. The move was part of the asset managers’ transition from German accounting rules to international accounting standards. In January, BHF-Bank set up a CTA for €800m in liabilities.
Dietmar Roessler, business manager, BNP Paribas Securities Services in Frankfurt, says there is a desire among large German corporates to move unfunded liabilities off their balance sheets and get them properly funded like their counterparts in the Netherlands and the UK. This represents significant potential for global custodians, he says.
Citigroup is targeting corporates with its recently extended depot bank and fund administration platform, originally developed for fund managers. Gottlieb says: “Corporates aren’t interested in back office functions and are prepared to outsource this type of activity.”
Another opportunity lies in the demand for more transparency, says Roessler. “In the past, an institutional investor would mandate a couple of investment managers, which would offer depot bank services for a subsidised, very low price,” says Roessler.
“The real money was made on commissions on foreign exchange, cash remuneration and trading fees. But these are areas where institutional investors are now asking for transparency and segregation.”
Grundmann says clients are requesting much more complex reporting, which are beyond the capabilities of some master KAGs and global custodians. “The regulatory reporting requirements and risk analytics clients need mean we are experiencing a large number of requests for very sophisticated risk reporting. Most institutional investors realise they need to establish a partnership with a provider to develop the necessary tools and processes for risk reporting.”
ABN Amro Mellon offers these services through Mellon Analytical Services, says Grundmann. Jörg Ambrosius, managing director, State Street Bank Germany in Frankfurt also identifies more sophisticated risk reporting as a significant trend in the market. “There is an increasing demand by the German regulator for regulated vehicles as well as insurance companies to provide more timely information, particularly around risk analysis and stress testing,” he says.
In the past, many institutional investors had largely manual risk reporting processes, which were adequate if data was delivered only every half year, says Ambrosius, but are no longer satisfactory. “Regulated investment companies need to be able to prepare, on an ad hoc basis, daily reports. Manual processes don’t allow for this, so companies need systems or a provider that can.”
State Street has developed online risk management and investment monitoring tools with Algorithmics, a Toronto-based risk management systems developer. The service, launched in January, offers a single point of access, via State Street’s web-based platform, to a range of tools and methodologies for calculating value at risk.
Germany’s Nestlé Pensionskasse is one of the first users of the service. Says Peter Hadasch, a member of the pension fund’s board: “In light of many pension schemes’ increased emphasis on managing risk and measuring investment effectiveness, State Street’s technology is a welcome addition to our programme. We now enjoy the ability to access our investment information in multiple views and forecast outcomes for varying levels of risk.”
Ambrosius says the online risk management service is “making waves in the industry” and that another prominent deal will be announced within the next couple of months. “This is an area our clients are really focusing on – they are trying to work out how to cope with the added requirements placed on them by the regulators. By teaming up with Algorithmics we can bring sophisticated risk analysis capabilities into custody and fund administration. That link was missing in the past.”
The reporting trend is not driven solely by regulatory pressure. Says Grundmann: “Multinational companies also want to keep a tight grip on their asset exposure. They want to see reports on VAR, stress testing and sensitivity analysis at the board level.”
The opportunities in Germany do not stop at its borders. State Street’s Ambrosius says the bank anticipates significant growth in eastern European markets, many of which are serviced out of Germany. State Street also services Germany’s neighbour, Austria, out of its Frankfurt office.
“Austria is a very attractive market, despite its small size in terms of total assets,” he says. “If you build a good reputation in the market, you will do well. There is now competition for local providers on the depot bank side, as the old in-house service model breaks down.”
BNP Paribas Securities Services also services Austria out of Frankfurt and is a remote member of the Vienna stock exchange. Says Roessler’s colleague Gerald Noltsch: “We can service Austria remotely because the systems and processes are very similar to those in Germany. This has proved to be the most efficient way to address the market.”