Sub custodians take on the might of the globals
31 January 2013
News, Asia, Global
By Toby Garrod
Globally diversified sub custodians, such as Standard Chartered and HSBC, are displaying clear advantages over US-based global custodian counterparts, such as BNY Mellon and State Street, as they forge ahead with global expansion strategies to in a bid to expand market coverage, in a process that is taking them increasingly further into the global custody space.
Such shifts are driven by global market dynamics. Sustained low interest rates in the West and low currency volatility are hurting the net interest margins (NIM) of global custody plays that operate out of the US, such as BNY Mellon and State Street. Meanwhile, both Standard Chartered and HSBC enjoy a more diversified global presence, particularly in respect to the emerging markets, and especially in regard to a prospering Asia, where low interest rates are less of an issue. As the clients they serve in Asia are expanding, so too are their custody needs, which is leading them to adopt global custody platforms.
“By virtue of the fact that we are growing with our clients in the emerging markets, we are absolutely advantaged at this point over our less internationalised competitors,” says Simon Cleary, global head of custodian banks at Standard Chartered. “This is pushing us to shift from our traditional role as a sub-custodial to something much more regionally driven. We are seeing bigger opportunities in terms of the provision of multi-market custody, primarily on a regional basis, but also globally.
While there is opportunity in many of the emerging markets, the Asia market is proving pivotal.
“As a service provider to Asian clients based out of Asia, there is clearly some protection from all the issues happening in the West because Asian markets are still growing,” says Mr. Cleary. “Markets in the West are very subdued. No question that, broadly speaking, it is the emerging markets [Asia, Africa and the Middle East] that are delivering better returns.”
While it was not possible to get the NIM figures for the specific custody divisions of these firms, a quick comparison of the 1H 2012 NIMs of a number of players in the global financial industry suggests the benefits to NIM of operating from the emerging markets: HSBC (237 basis points (bps)); Standard Chartered (230 bps); Barclays (189 bps); RBS (192 bps); Bank of Communications (261 bps); Northern Trust (124 bps); State Street (136 bps (4Q 2012)), and BNY Mellon (120 bps (3Q 2012)).
“The interest rate environment continues to be challenging across the markets. Being part of a universal bank with proprietary network in 41 countries enables HSBC Securities Services, and its clients, to navigate these conditions better,” says Jitendra Somani, head of global custody, Asia Pacific, HSBC Securities Services.
Such positioning in the growth markets plays neatly into a broader trend in which sub custodians are expanding to offer global custodian services.
“I think that we are seeing a blurring of the line between sub-custodian and custodian... From our perspective, we are growing with these clients, so our capabilities are by definition becoming more global. One of the key trends we’ve seen over the past couple of years, and I’m sure it will continue, is the blurring of boundaries between sub- and global custody,” predicts Mr. Cleary.
“Three years ago we were in 16 or 17 markets that were almost all in Asia; now we are in 39 markets across these three regions (Africa, Asia and the Middle East). Also, the types of services we are offering is also expanding, which is really driven by the need to be able to provide something that takes us way beyond traditional sub custody, to the ability to do multi-market custody as well as direct custody.”
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