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Impact Investing

IPE special report May 2018

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The euro as Trojan horse

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Has the euro changed anything in the custody business? One year ago, hopes were high that the creation of Euroland would dramatically transform the way in which custody was delivered, as well as levelling the playing field for the indigenous custodians. By some, the euro was seen as the philosopher’s stone, magically transforming Europe into a golden market for investors and custodians alike, where the Americans no longer dominated the scene.
Maybe that will happen, but the odds have lengthened considerably. Whilst a few atavistic European custodians continue to play the ‘local is best’ card, berating the US banks for their inflexibility and insensitivity, most have tacitly accepted that their best hope of survival lies in one of two strategies: stay focused on their domestic market franchise, or hook up with an American bank. Each has its merits and drawbacks, and neither has yet proved to be a certain winner.
Staying in the home market has worked incredibly well for HSBC’s Global Investor Services business (GIS), which has outlasted all its rivals to become the only British global custodian, with custody assets of around $1trn. As all the other UK banks have withdrawn from the custody market, GIS has swept up their clients and portfolios with a combination of aggressive pricing and a strong corporate banking offering. Most recently it was awarded a £5.8bn (e9.5bn) mandate from Shell Pensions Management, a former client of Lloyds TSB Securities Services (LTSS), barely raising a sweat to beat off a limited challenge from State Street for an entirely domestic portfolio.
The logical next step for GIS is expansion into continental Europe, but that road is fraught with difficulties. Many of its biggest clients are foreign banks, and it cannot afford to upset them by competing for custody business on their home soil. Not only would such action endanger its own client base, but it would also threaten the Asian custody mandates held by its ultimate parent, the Hong Kong Bank. The two businesses purport to be entirely separate, but that is not how they are perceived by clients. Interestingly, the new management at GIS has already gone on record as saying that it will not aggressively pursue global custody business on the continent, a major shift from its previous plans, which foresaw local sales and client service teams across Europe.
As GIS grapples with these problems, its European neighbours have different ones. With its takeover of Bankers Trust, Deutsche Bank has inherited a custody and fund administration business that has created as many headaches as it has solved. Its fundamental challenge is to get the management structure right, but it has yet to crack the code, losing senior staff in the process. With the potential of The WM Company behind it, Deutsche’s opportunity in the European pension market is huge, but it has been treading water for the last 12 months and still seems more concerned with internal, rather than external, affairs.
When they announced their marketing alliance at the end of 1998, the message from Mellon Trust and ABN Amro was clear: the alliance would take the best of American technology and European relationship management to create an impressive global service offering. Have they delivered? If they have, they are keeping very quiet about it. In June last year, Mellon’s head of global securities services, Jim Palermo, said this: “The proof of the success of this partnership will be when we have converted the business and clients are pleased with the services they receive”. More than a year after the formation of the alliance, that evidence is still hard to come by.
One European bank that does not fit the mould is MeesPierson, the Dutch subsidiary of Fortis, the Belgian financial services conglomerate. MeesPierson, which has a strong reputation as a Dutch sub-custodian and a derivatives clearing specialist, is looking hopefully at the UK pension fund market. It believes that there is an opportunity to garner valuable mandates from the fall-out of the LTSS withdrawal, and is actively pursuing clients who, it feels, might be shunned by the bigger global custodians.
Regardless of what strategy they pursue, however, all the European global custodians are discovering just how wide the gap is between drawing up a grand plan and making it a reality. In 1999 few of them made any serious impact on the global custody franchise of the American giants, in spite of the euro. In fact, the euro may work in precisely the opposite direction, acting as a catalyst for investors to re-evaluate their administration arrangements and move away from their cosy relationships with their house banks. Perversely, the euro could ultimately be responsible for even greater domination of the European market by the Americans. That’s a scenario that few could have predicted at the start of 1999.

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