US bank, State Street Corporation is set to become the largest custodian worldwide after signing definitive agreements with Deutsche Bank to acquire its global custody business. Deutsche’s business has assets under custody of approximately e2.2trn, taking State Street’s assets under custody up to almost e8trn, but some market participants warn that State Street will have to work hard to make the acquisition of such a low-profit business succeed.
The move, expected to be completed within four months, will see State Street take on Deutsche Bank’s fund administration services, Depotbank services, securities lending, performance measurement (including the WM Company), benefit payments businesses, and UK and US-based domestic custody and securities clearing – assuming approximately 3,200 employees worldwide, and operations is New York, Nashville, London, Frankfurt, Dublin, Edinburgh and Singapore.
“This is a huge acquisition. Indeed it shows commitment to the market, but State Street is extremely brave taking on a deal of this size and presence,” comments one onlooker.
The biggest risk, it seems, concerns integration due to the enormity of the acquisition. With State Street tied up in the deal for the foreseeable future, market players suggest that clients may be tempted to look elsewhere. As UBS Warburg points out in its research: “competitors have eagerly awaited a wave of RFPs to circulate as Deutsche customers contemplate whether to convert to State Street or go elsewhere.”
“Clients want the best service possible. State Street must work very hard to prove to their clients, both current and potential, that the Deutsche deal is not going to consume their attention,” advises one competitor.
However, the “attrition of customers” does seem to have been accounted for says UBS Warburg’s research. State Street has agreed to pay an initial sum of e1.2bn to Deutsche, which may be reduced depending on run rate revenues at close of deal, and then will make payments of up to e300m – also dependent on business transitioned one year on. According to CSFB research, the business is currently running at breakeven for Deutsche (revenues and expenses at about $700m annually).
Merrill Lynch analysts believe the attrition risk to be mitigated by State Street’s long-term contract for Deutsche’s own custody business, which accounts for 25% of revenues in the acquired entity. As part of the agreement, State Street will provide global investment services to Deutsche Asset Management, and will also provide custody, fund administration and global securities lending on a long-term basis with the potential to expand the mandate to DeAM’s investment management affiliates.
Even sceptics have to agree, however, that, for State Street, the acquisition has considerable benefits. The broadening of State Street’s global client base particularly with regards to Europe will give the US bank a clear competitive advantage.
“State Street will need a lot of hard work, and a lot of good luck. That said, if State Street makes this work in the long run, it will be taking a big step forward in the domination of Europe, which will put it firmly on the map,” says a competitor.

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