New growth from old Europe

Click here to see the ranking.

The citizens of France and the Netherlands may have dealt European integration a setback when they rejected the proposed European Union constitution in separate referenda in their respective countries this spring. But as far as institutional investors are concerned, Europe is ever more clearly one market, and they are increasingly turning to global custodians that can provide cross-border services for asset portfolios, wherever those custodians are based.

As Europe permits more cross-border financial services, investment managers based in the region are branching out from their national markets to offer their wares in other European countries. But that expansion is rendering obsolete the back offices those managers developed to handle trading in their home markets, argues Anthony Solway, who heads BNP Paribas's U.K. securities services business out of London and is global deputy head of relationship management, focusing on investment managers, plan sponsors and other institutional investors. "We are helping some asset management clients to dismantle them," Solway says. He expects strong growth in the bank's investment management back-office outsourcing business as a result.

Paris-based BNP Paribas's global custody assets grew 28.9 percent, to more than $2.4 trillion, in the 12 months ended March 31, 2005, driven in part by cross-sales of global custody mandates to customers of Cogent, an investment operations firm it acquired from Australia-based financial services giant AMP in 2002.

The $540 billion increase in BNP Paribas's global custody assets helps the bank climb one rung to take fourth place in Institutional Investor's annual ranking of the world's biggest global custodians by assets in custody, as of March 31, 2005. BNP knocks Boston-based global custodian State Street Corp. from fourth place last year to fifth in 2005. Leading this year's ranking once again are three New Yorkbased firms: Citigroup, with more than $4.5 trillion in global custody assets, followed by J.P. Morgan Chase & Co., which retains second place with slightly more than $3.0 trillion; and Bank of New York, which holds on to third place with almost $2.8 trillion in global custody assets.

在全球cust州街跑了大约2.3万亿美元ody assets as of March 31, up from $2.1 trillion the year before. It too sees Europe as an important source of new business. For example, in 2004, Paris-based AXA Investment Managers decided to outsource fund administration, fund accounting and investor operations support for more than E300 billion ($409 billion) in assets under management to State Street, after a close competition among State Street, BNP Paribas and another provider. As part of the deal, State Street picked up 200 AXA employees in France and Germany and later an additional 100 when it took over AXA's U.K. operations. "State Street had the longest experience with large, multidomicile transfers and liftouts," says Jean-Benoît Naudin, head of operational support and service management for AXA.

"Very clearly, the opportunities in Europe today are moving out of in-country opportunities to pan-European mandates," says Joseph (Jay) Hooley, executive vice president and head of global investment services for State Street. He likes his chances of picking up business. "We sit in eight countries, with 4,600 staff running common systems for custody, accounting, middle offices, securities financing and other services," he says. As settlement practices become more standardized and straight-through processing rates rise, more asset management and custodial services will become cross-border. European custody providers are catching up, but few if any can offer pan-European custody on common systems today, Hooley contends.

New business from the U.K. and Europe has been a significant source of growth for Chicago-based Northern Trust Co., contributing to its 35.0 percent gain in assets. With more than $1.0 trillion, Northern finishes eighth this year, up one notch. Among notable gains: a $17 billion mandate from Swedish insurer Folksam and a £16.2 billion ($31.2 billion) win from M&G in the U.K. "Our biggest areas of growth are in the international marketplace," says Serge Boccassini, senior vice president for global corporate and institutional product and marketing management at Northern Trust.

Organic growth in custody assets was even more important in 2004 than in previous years because of the paucity of mergers among leading custodian banks. The only sizable deal was London-based HSBC Holdings' $1.3 billion acquisition of the Bank of Bermuda, which was announced in 2003 but did not close until early last year. HSBC Bank's global custody assets jumped 149.7 percent year on year, to more than $2.2 trillion; the bank holds on to sixth place in our ranking. (The increase also includes Asian custody assets not reported by the bank in 2003.) Paul Stillabower, who heads global business development out of London for the bank, attributes about $700 billion of the boost in assets to organic growth.

So are global custody mergers a thing of the past? Bankers aren't betting on it. Scale and global reach still count for a lot in the global custody business. "As the world continues to look for integrated solutions and organizations buy globally, they are going to look for providers who can serve them across the globe," says Frank Bisignano, chief executive officer of global transaction services at Citigroup.

If global custodians cannot be the biggest overall, they can excel in niches. That's what Brown Brothers Harriman, a New Yorkbased private bank, has done. Although it ranks ninth by global custody assets, with less than a quarter of Citi's assets, it ranks first or second in several of the lines it concentrates on, says Susan Livingston, a partner responsible for Asia-Pacific and offshore investor services at BBH. "We are the largest U.S. subcustodian to Japanese banks, and we have a 40 percent market share in Switzerland and 90 percent in Scandinavia," she says. The bank's global custody assets grew 41.7 percent in the 12 months through March 31.

Global giants and niche players alike will have to continue to invest in technology and focus on the global custody business to shine. "To be successful in investor services or custody, it is not sufficient to just be a big custodian," says Patrick Curtin, head of investor services in the U.S. for Bank of New York. "It is more important for custody to be a big part of who you are as an enterprise."

---

This survey is based on information provided to II by the custodians. Researcher Theodore Howard gathered the data under the guidance of Senior Editor Jane B. Kenney.