The big three French custodians all reported a rise in custody assets this year, but they are not celebrating yet. Fee pressure, regulatory costs and low interest rates continue to put a strain on profits. George Mitton reports.
Each year Funds Europe visits Paris to meet the big three French custodians – BNP Paribas Securities Services, Societe General Securities Services (SGSS) and Caceis – and each year the visit falls a few weeks after our magazine’s annual custody survey.
Naturally, we ask the custodians about the figures they reported to us. If their assets under custody have risen, what explains the success? If they have fallen, what went wrong?
This year, all three custodians reported a rise in assets under custody. BNP Paribas SS reported custody assets, as of June 30, that were 16% greater than what it reported in the previous year’s survey, while the figures from SGSS implied a 7% rise and the figures from Caceis implied a 5% rise.
This was a turnaround from 2012, when our survey revealed that both SGSS and Caceis had seen their assets under custody decline in the previous 12 months.
Does this mean all is well in the field of French securities services? Not quite. Take the example of BNP Paribas SS. Although its assets under custody had gone up, revenues in the first half of 2013 were down 1.7% compared with the same period in 2012, according to the financial statement of banking group BNP Paribas.
Clearly the market is still very challenging despite custody asset gains.
Revenues and profits are under pressure at asset servicing firms for three reasons: the low level of interest rates; a decline in income from fees; and heavy regulation which clients want their custodian to pay for.
François Marion, chief executive of Caceis, is willing to speak bluntly about the challenges faced by the industry. He expects interest rates to stay low for a long time, and sees few opportunities for custodians to raise their fees. The solution, he says, is to reduce his overheads.
“I started to cut my costs before the financial crisis,” he says, speaking from the Caceis headquarters by the river Seine. “The future belongs to those who can cut costs.”
Marion is also pessimistic about the effects of regulation, believing, like many in the asset servicing industry, that custodians will have to bear the burden of implementing rules such as the Alternative Investment Fund Managers Directive (AIFMD).
Some have argued that the new regulations offer an opportunity for custodians to sell new services and perhaps even increase revenues, but Marion says the prospect of increased revenues is wishful thinking.
“That’s just what we say to be optimistic. It’s communication. If asset managers are savvy they will look to their providers and push for a cost reduction.”
Caceis is hoping to raise revenues by investing in its derivatives clearing facilities. Marion also hopes to expand geographically, though he is sceptical his firm can make an impact in Asia. He says Caceis is concentrating on European expansion, with new projects in the Netherlands, Belgium and Italy.
“Due to the pressure on prices, it’s extremely difficult to increase revenues, we have to increase the scope of our activities, geographical areas, products and new clients,” he says.
Marion is also cautious about drawing too many conclusions from the numbers companies provide for their assets under custody. He says it is possible to use double or triple counting to inflate these figures. Perhaps a company has assets in one country that it safe-keeps in another, and counts the assets twice; or perhaps the company counts 100% of the assets of a joint venture as its own.
There is another reason not to draw too strong a conclusion based on assets under custody – the figures may bear little resemblance to a custodian’s bottom line. Some assets are profitable, some not.
“If you only do local custody you can pile up the assets but you make a low return. What’s important is the quality of and return on the assets,” says Marion.
Nevertheless, Bruno Prigent, global head of SGSS, says the 7% increase in assets under custody at his firm reflects an improved operating environment compared to the previous year.
Funds Europe met the executive board of SGSS at the company’s offices in Colombes, in the Parisian suburbs. Over a boite – an elaborate packed lunch – Prigent explained that rising stock markets had given a boost to his business, though challenges remained.
“We are happier but it’s still difficult,” he says.
One positive piece of news for SGSS is that the rumours that the unit would be sold, which circulated last year, seem to have gone away. Prigent said the company was never a good candidate for a sale because it was closely assimilated with its parent company, the banking group Societe Generale.
“When you are a separate unit of a group, you are easy to sell. When you are a department, it’s not easy,” says Prigent.
“Stickiness is everywhere,” adds Etienne Deniau, head of business development, asset managers and asset owners.
The decline in rumours of an acquisition have reassured clients that there will not be a shift in tactics at the company.
“Stability is good for our clients and prospects,” says Prigent.
The company does have some particular challenges, though. The burden of the AIFMD will be felt particularly heavily at SGSS, says Deniau, because the company has so many alternative investment funds as clients.
Can some of these clients be persuaded to share the costs of complying with the directive? Deniau smiles.
“Yes and no,” he says.
STRICT ON PROFITS
Over at BNP Paribas SS, which has its headquarters in a converted flour mill in the Pantin suburb of Paris, executives insisted the pressure on costs could be overcome.
One of the company’s big client wins in 2012 was Caisse des Dépôts et Consignations, a giant state-owned financial institution. The migration of more than €300 billion in assets was reflected in this year’s custody figures.
The mandate was clearly an important win, but is it true, as some rival firms have claimed, that the deal was done for very low fees? Philippe Ricard, head of asset and fund services, insists the deal was still profitable for BNP Paribas SS – otherwise the company would not have done it.
“We are strict on how we manage profitability. We measure everything and we don’t do silly pricing, because it is dangerous for the industry altogether. We won’t be the ones to push everyone off the cliff.”
Ricard says BNP Paribas SS has lowered its fees, but only because it has cut its costs.
“We have delivered a huge number of internal efficiencies to be able to price competitively,” he says.
The company has been expanding in recent months. In July it announced the purchase of Commerzbank’s Depotbank business, which had €93 billion in depositary assets as of April 2013 and employed 80 people.
There could be more acquisitions coming. Jean-Laurent Bonnafé, chief executive of banking group BNP Paribas, has said securities services are important to the group and indicated he will support BNP Paribas SS in acquisitions.
Expansion through growth and acquisition is important, says Ricard, because larger custodians are better able to realise more economies of scale.
“In the long-term, we are in a business where size matters.”
©2013 funds europe