Low interest rates and quantitative easing are there to foster growth. But the custodians see another side of the story. Nick Fitzpatrick talks to custody heads about countering revenue pressure.
Low interest rateS and the cost pressure of new regulation are two reasons why custodians have wrestled with profitability in recent years.
Funds Europe asked the asset servicing heads at Sibos how they are confronting the revenue challenge.
Alain Pochet, head of clearing, custody and corporate trust services, at BNP Paribas Securities Services, says: “I have a strategy to be a player in the 28 main markets of the world.”
He points to the recent opening of an office in Colombia, which is also one of the world’s 28 largest markets.
François Marion, chief executive officer at Caceis, says the objective has been to win new clients.
“We’ve widened our offering in clearing and execution for listed derivatives, and for private equity and real estate funds under the AIFMD [Alternative Investment Fund Managers Directive].”
Caceis has also extended its presence to Italy, Switzerland, Belgium, and the Netherlands, and has applied for a depositary licence in London.
Bruno Prigent, head of Societe Generale Securities Services (SGSS), points to operational efficiencies as part of a three-year business plan. “We will continue to invest and increase the range of products and our geographical presence. The second pillar of our plan is to build a single platform for custody. We have a single fund administration platform for Ireland, Luxembourg, France and Italy, and we aim to develop a similar platform for custody.”
Cian Burke, at HSBC Securities Services, points out that HSBC’s emerging market-focused business has, to an extent, been cushioned against the impact of falling interest rates.
“We have been less susceptible to reduced interest rate margins because of our broader exposure to other parts of the world,” he says. “There are attractive margins still in India and China for example, and we’ve seen escrow account balances off the back of some interesting M&A activity over the last couple of years. I make little if anything in Europe but diversification in interest margins means we are not as impacted as other providers.”
It is a similar story at Standard Chartered, a bank that also has significant links with emerging markets. Margaret Harwood-Jones, head of investors and intermediaries, says: “We are in markets where relative to many other parts of the world there are higher margin opportunities.”
She adds: “Also, from a client development - and therefore revenue - perspective, we are knowingly undersold versus the capability in the bank.”
Pricing pressure in custody appears intense, with a tension between offering as cheap a service as possible, and getting suitably rewarded for risk.
Harwood-Jones says: “We will always be priced competitively and will not compete on price. We have risks to mitigate in the markets we operate in and we need to price those risks properly.”
HSBC has ended some relationships with clients who were not profitable. Burke says many custodians will “give custody away” and hope to get ancillary income streams. HSBC, he says, has-focused its business to service institutional clients that have international businesses and so “benefit from our end-to-end solutions and our geographic coverage. That’s meant we’ve ended some relationships over the last two to three years and probably 20% of those were not profitable for us.”
Mathieu Maurier, global head of sales and relationship management at SGSS, says: “When it comes to the size of a mandate, it is fair to say that the size of an asset manager may be an issue in the long-term due to increased regulatory-related costs.
“Our role as a securities services provider is to help our clients optimise their operational setup and mitigate these costs whenever possible, but the relationship inherently needs to be cost-effective for all concerned.”
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