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The New Year is always a good time to look forward – but with optimism? What is the future for the custody industry?
Of course, we don’t know the future but there are some interesting drivers for 2011 and beyond and they are not all pulling in the same direction.
Regulation will always be a major factor, commercial competition is always in the mix but IT led initiatives seemed to have dried up – we’re all on the internet these days, and STP is now a given – thank goodness we can put that in the done drawer. Even the regular stream of new products is not as exciting as it was; just a tweak to existing processes is all that is required. So are we looking forward to a benign environment?
Last year was a busy one for the custody sales teams with a large number of RFPs in the market. Thomas Murray had its fair share with two of the major Swedish funds AP1 and AP4, KLP in Norway, the Phoenix Group in the UK plus a host of ones we can’t name in Europe, Canada and Australia. So a healthy stream of business to keep the global custodians keen. There is every indication that this will continue into 2011 with asset owners continuing to focus on asset safety. That’s good news.
We are still pulling out of the nosedive that was the financial crisis. The revenue stream for the custodian banks will take some time to recover. Ad valorum fees based on asset values are now recovering (looking at my screens) along with transaction volumes and therefore fees should head up, especially if the hedge funds regain confidence. Interest rates look to be heading in one direction as commodity prices work through as inflation and stock lending will recover if the hedge funds redeploy their old strategies (it would be a brave person to short the market until it recovers from the falls we have seen). All a bit speculative but you don’t need all of them to come true at once.
The emerging markets will probably save us. The potential for privatisations must be enormous – look at Coal India and the Chinese banks. These markets can only continue to grow as more and more companies come to market. The assets will be held domestically of course, but also internationally and the Globals will pick up this business. More good news.
While the fundamentals for the custody banks might be good, the same does apply to the investment banks. We don’t see the investment banks moving back into custody to capture flow, but those that are already there will have an edge. Regulation will be the major determinant of competition and it will be a vector not a scalar - it’s all going in one direction. The authorities want big banks with deep pockets and the BIS are laying down the ground rules. The regulators, via AIFM and UCITS V, are doing their bit by forcing the custodian banks to underwrite their networks. This all points to big universal banks running their own network and that’s not where the trust banks are. Having struggled to create middle offices to support derivatives etc, the trust banks now have a new challenge. Will they survive? Something to keep your eye on for 2011.
Tim Reucroft, Director, Investor Services
treucroft@thomasmurray.com |
