Old structures on the way out
Iain Morse reports on the transformation taking place in the Italian custody market
“There has been a lot of movement in the Italian custody market over the last 12 months or so. The old structures are breaking up,” says Jörg Ambrosius, head of custody services for State Street Bank Europe. Indeed, a series of deals, tie-ups or takeovers between global custodians and domestic Italian players are transforming the industry.
State Street’s acquisition of Intesa Sanpaolo’s Security Services division in Italy and Luxembourg - announced last December - is a case in point. At a cost of approximately €1.28bn, State Street purchased a custody business with around €343bn in assets under custody, and some €140bn of cash under depositary services.
Other important deals include BNP Paribas’ purchase of Banco Populare de Milano’s (BPM) custody business for a reported €55m, due to be completed this month. Most of the assets in this deal come from asset management companies owned by BPM, notably Anima. Included are 92 funds, with an aggregate value of approximately €20.3bn, of which €19.1bn is in long-only equity, bond and cash funds, with the remainder in hedge funds and property.
Both of these deals came on the heels of RBC Dexia’s acquisition last September of Unione di Banche Italiane’s custody business. The deal cost around €93m for assets worth just over €19bn, mostly belonging to UBI Promenca, the bank’s asset management division.
RBC Dexia has a strong focus on custody for Italian pension funds as well as the broader asset management industry. “We think pension savings and the value of pension funds will grow rapidly and public attitudes on the need to save for retirement will change rapidly,” says Paride Amiotti, managing director of RBC Dexia in Italy. Subject to complex regulations, pension funds employ both a depot bank and an external administrator, with the latter meeting these regulations. “The question is whether, as pension funds diversify into new asset classes, smaller depot banks will want to make the investment to go with this process of diversification,” adds Amiotti. “We think they will not.”
Prior to this, in 2006, SocGen had already purchased Italian UniCredit Bank’s custody business. The background to this is familiar from neighbouring markets, particularly Germany.
“This was a vertically integrated business model, with big groups doing everything in-house,” notes Claudio Pinna, senior consultant at Hewitt in Italy. With investment returns expressed on a net basis and many management charges effectively hidden from investors, this system ran contrary to the tightening regulatory environment created by the EU. It also encouraged Italian investors to move their money abroad. No less than €65bn was withdrawn from Italian mutual finds in the first six months of 2008, according to Assogestioni. A crisis in the fortunes of the industry developed and so things had to change. Accordingly, in July 2008, the Bank of Italy called for extensive changes to the corporate governance of the Italian fund management industry.
These changes included bringing independent directors to the boards of asset management companies, the separation of these from the banks that own them and tax reductions on investment returns. Meanwhile, there have been successive attempts to reform the Italian pension system.
Employees were also granted the right to invest their trattamento de fine rapporto (TFR) retirement lump sum from cash held by the employer to a qualifying pension fund. COVIP, the Italian pension regulator, reports a substantial increase in the numbers of employees with private pensions, joining either closed employer-sponsored funds, open industry-wide funds, or investing with insurance company plans, which frequently offer a guaranteed return. Overall, these changes are expected to lead to more retirement-related saving.
At present, aggregate pension assets are estimated at €50bn, although this total requires interpretation. There are some very large pre-1993 defined benefit pension schemes still in existence, the so-called defined benefit INPS (DB INPS), particularly in the financial services industry. In 1995, employees with less than 18 years’ entitlement and all their juniors were offered membership of defined contribution INPS (DC INPS), which superseded the DB INPS. But only about 25% of major employers offer any sponsored pension scheme.
Provision for middle and senior managers, by contrast, is widespread. “The habit of relying on state pensions remains very strong,” says Pinna. All employees have the voluntary right to contribute to industry-wide collective defined contribution schemes, although Pinna notes that contributions remain lower than they should be.
This is still a fragmented market but these changes have set the scene for rationalisation, while the prospect of growing premiums to private pensions have whetted the appetites of the global and pan-European custodians seeking new market share. Depot bank and custody charges have been high by European standards - estimated in the 8-11 basis point range. Economies of scale should permit the global custodians to reduce these and still make good profits.
After all the current round of acquisitions have been completed this summer, the aggregate custody market, including pension monies, will be roughly divided as follows: State Street 40%, BNP Paribas 16%, SocGen 10% and RBC Dexia 10%. This leaves market share to fight for and potential for further acquisitions.
There are 30 or so remaining depot banks with captive business from their parent banks and asset managers. Of these, six or seven are seen as possible targets for acquisition with several billions of assets under custody. The single biggest bank remaining is Banco Populari, with an estimated €27bn of assets under custody, or around 12% of the total market. Opinions are divided over how further rationalisation will take place. “Personally, with the exception of Banco Polulari, I don’t think there will be much interest in buying business, but there may be room for partnerships and revenue sharing,” says Giofredde. “Only time will tell.”
In Italy, as in Germany, the remaining small depot banks face a tough choice. They can try to sell now or stay in the game but with little hope of winning any new business. On the other hand, some of the assets under custody with the small custodians might not be of great interest to global players.