October 2008

NORDICS: Going it alone ...

Nordic custodians are under greater pressure to provide sophisticated asset services. Many have sought alliances with foreign banks. Angele Spiteri Paris speaks to SEB, which still acts alone ...   Global custody providers have been a mainstay in the Nordic landscape for a number of years, however now Skandinaviska Enskilda Banken (SEB) remains the only large local player that has not formed an alliance with a foreign firm.

“There aren’t that many local providers left,” says Göran Fors, head of custody at SEB, “We are the only one in the Nordic region still working independently and we will continue to do that.”

All the large Nordic custodians, apart from SEB, now have some form of alliance or strategic partnership with a global firm. For example, Swedbank and JPMorgan Chase, Handelsbanken and Northern Trust.

Fors expresses his scepticism about the numerous partnerships that have mushroomed in Scandinavia. “I think there are very few partnerships that have been a success,” he says. “Generally alliances are difficult. Once you embark on the road of who’s going to do what it is sometimes better if you actually just divest.”

This is exactly what Nordea did by selling off its institutional custody business to JPMorgan Chase in March this year. The bank agreed to hand over its e200bn (£158.6bm) in assets under custody over the following twelve to 18 months.

This meant the termination of Nordea’s almost three-year strategic alliance with The Bank of New York – in place since August 2005. The sale to JPMorgan may have come as a surprise to some, but it could have very well been the best option, saving both parties confusion and a struggle in the future.

“Nordea’s decision to sell out made sense,” Fors notes. He believes the firm probably felt it did not have the resources to support the expertise needed for certain clients.

Patrik Edström, head of business control and strategy at Nordea, explains that the lack of resources was indeed the reason for the divestment. “The institutional global custody landscape is changing rapidly on the back of increasing customer demands and significant economies of scale. Even as a regional market leader  Nordea lacks the resources to keep up with developments in this globally consolidating industry,” he says.

He also corroborates Fors’ comment regarding the choice between a partnership and a sale of the business. “With regards to global custody, it is our analysis that a partnership will not offer our clients and ourselves the flexibility required long term. Other custodians may choose different models depending on their current position and strategic priorities,” Edström says.

Most often alliances are drawn up in an effort to support both businesses and in the case of the Nordic players, they seem to be looking to foreign firms to fill any gaps in their service provision as competition continues to heat up.

One-stop shop
There are not many Nordic institutional investors to fight for – around 15 – but the pressure to give them what they want continues to mount. This could be part of the reason domestic custodians feel they need the support of a global player.

Given this environment the burgeoning alliances could be seen as a direct result of client demand for a one-stop shop – with custodians looking to bring in expertise in areas in which they are less knowledgeable.

So what’s so different about SEB? In SEB’s case, Fors believes the firm can offer its clients all they require, without the need of foreign support.

“I think there is a definite trend that requires custodians to offer investors services that run along the whole of the value chain. They are looking for a service that is almost fully integrated.”

The custody business has been a significant part of the overall SEB group’s offering. According to Ulf Grunnesjö, SEB’s head of investor relations, custody made a significant contribution to the company’s P&L over 2007.

“Net fee and commission income grew at stable levels during the year and commissions from custody asset management contributed to that increase,” he said during a conference call discussing the group’s earnings.

Keeping an edge
However, the strategic partnerships and consolidation in the market can be considered a cunning move by the domestic players to leverage the investment made by foreign firms while still maintaining an edge in their home markets.

Luciana Pacor-Hygrell, senior vice president of Nordic custody services at Handelsbanken, says: “The globals are investing billions of dollars into their systems.   Handelsbanken has built a partnership with Northern Trust and has a proven three-party offering. Hereby we provide the best services from a global custodian combined with a local offering.”

Global custodians have been active in the Scandinavian market for sometime and Pacor-Hygrell explains it has now become a matter of course. “We are not intimidated by the global presence but rather we adapt with different strategies” she says.

JPMorgan has made significant progress in breaking into the Nordic market and according to Nordea’s Edström, the presence of global firms is only bound to increase. “Global players have made significant inroads towards tier-one clients based on a global platform supporting increasingly complex services. However, local players remain the preferred alternative for the majority of clients. Over time, global players will make further progress with their local presence.”

Pacor-Hygrell also mentions that local custodians look more to service the tier-two and tier-three clients,  leaving the higher-end institutions to the global firms, or offering them a service in partnership with a global custodian. “Everyone seems to have their own strategy and niche in the market,” Pacor-Hygrell says.

Edström, of Nordea, adds: ”Many of the largest Nordic institutions are serviced by global firms. The global firms have been targeting the largest mandates, servicing them out of Continental Europe or the US. It is our experience that tier-two clients favour the local support and expertise as well as the broader banking relationship that we can provide.”

SEB, however, is a Nordic custodian whose clients are tier-one institutions, according to Fors, and so the weight that a foreign custodian brings is not always necessary.

In spite of the positive aspects of teaming up with large global institutions, foreigners may not always have what it takes to crack the Nordic market.

Fors comments: “I think we sometimes overestimate the importance of the extremely advanced technology that some of the American players might have. I believe some services we offer can compensate for any technological shortcomings.”
He explains that local custodians combine their regular custody services with elements of investment banking – cash management and prime brokerage among other functions.

Future plans
Discussing what the future holds for SEB, Fors says the firm will look to increase its securities lending services. “We have been very focused on Nordic securities and now we are trying to expand to lending global assets,” he says.

The challenge to keep abreast of investment developments will undoubtedly continue although as yet, SEB has not yet met a hurdle it has not overcome. “In general, I think we have kept up quite well with the trend for institutions to invest in more difficult markets – such as Africa,” notes Fors. “We always have to make sure we are covering the investment needs for all the different products out there.”   ©  2008 Funds Europe

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