[ M A R K E T
custodians provided it makes economic
sense or leads to material improvements
in the existing service offerings. “If two
custodians decide to merge simply to
acquire scale, clients are not necessar-
ily going to be happy,” says a securities
“M&A is viewed by some
insiders as a possible
solution.”
services’ executive. “If a merger results
in that custodian offering new products,
services and giving customers greater
geographical exposures, then clients are
going to be more positive and receptive to
the transaction.”
However, consolidation at sub-cus-
todians is rife with potential problems
and can occasionally test the patience
of broker-dealer and global custodian
clients. “Clients support competition and
they do not want to be held hostage to a
quasi-dominant or monopolistic provider
in a single market,” says one expert. The
senior executive agrees, adding M&A at
sub-custodians can result in customers
withdrawing business if they feel there is
excessive concentration risk following a
takeover.
R E V I E W
Despite this, clients do tend to be more
tolerant about M&A among sub-custo-
dians in provincial markets. “In smaller
markets, clients are pragmatic that their
providers may exit or local custodians
may merge because the businesses are
not always profitable. They are not happy
about it when it happens, but they rec-
ognise it is inevitable sometimes. Having
concentration risk to a single provider in
a small provincial market where client
activity is negligible is very different in
the grand scheme of things to having total
exposure to a lone provider in a mid-sized
regional market,” says the expert.
The big picture
While there was speculation and media
conjecture about the possibility of a re-
surgence in European bank mega mergers
during summer 2018, custody was prob-
ably not a priority talking point in any of
those boardroom discussions. “Custody
– at some of the larger universal banks –
accounts for a small percentage – say a
few percent of total company revenues.
It is not, and has never been, the primary
motivator for two large banks to join forc-
es but an offshoot,” says the expert.
Even so, the appetite for mergers
generally at the majority of large banks
and market regulators is not strong, with
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C U S T O D I A N
M & A ]
memories still scarred by some of the
more notorious pre-crisis buyouts, most
notably RBS’ catastrophic acquisition of
ABN Amro, a decision which left the UK
taxpayer shouldering losses of £45 billion
and soured public perceptions of banking
more broadly. While a mega-merger is not
an improbable feat, M&A activity - should
it happen - is likely to be confined to sin-
gle or regional market providers.
“A merger between two large equals
is doubtful. The primary M&A activity
happening today at custodians are bolt-on
“In extremis, some banks
may decide to exit custody
without even finding a new
buyer.”
acquisitions. This may be a custodian
purchasing a front-office outsourcing
system to add to their existing middle and
back office capabilities or obtaining an
equity stake or ownership in a FinTech or
RegTech company. Post-crisis constraints
and prudential regulation have made
it harder for custodians to make large
acquisitions,” says the securities services
executive.
Fall 2018
globalcustodian.com
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