As passive investment continues its relentless takeover of the asset management industry, securities servicing is a sector under acute cost pressure. It is highly commoditized and margins are so low that it can be tough to differentiate on anything but price.
The winner of the award for the world’s best bank for securities services has an edge, however, and that is scale. Citi is Euromoney’s winner in this new category for 2022.
“Clients are under cost pressures,” explains Okan Pekin, global head of securities services at Citi. “ETF [exchange-traded fund] fees have been driven to very little; if asset servicing doesn’t keep up with that margin pressure, everyone loses the business. The only way you can keep it is to keep positively reinforcing the cycle, using tech and using the network to drive more scale through your system.”
Shortlisted
- State Street
- BNY Mellon
The capital-light nature of securities services makes it an attractive business from a risk-weighted asset perspective, and profit margins can be very attractive. Although the market is dominated by a small number of large players, securities services encompasses so many disparate activities it can be hard to make meaningful comparisons: core custody and settlement, fund valuations and issuer services are very different from work on the triparty collateral management side.
Operations technology makes up the bulk of costs – and this is where the battle for prominence is playing out.
“There is a secular trend of unit cost pressure on everybody – the yield on AuC [assets under custody] is a lot less now than it was a number of years ago,” says Pekin. “You have to use better tech to make yourself more efficient so that the cost of delivery to the client comes down.
“Fewer human touch points lead to better user experience – snowflake costs less to deliver than mainframe. The big race for us is not to respond to cyclical trends, more to use tech competitively as an advantage to drive unit costs down.”
The bank recently hired Joe Bonanno from Morgan Stanley as global head of data, digital and innovation for the securities services business.
“Rapid technological change is starting to affect the asset servicing industry in a meaningful way,” says Pekin. “You have to deliver a differentiated client experience and product delivery, and you need to drive your unit costs down all the time.”
Examples of this include the conversion of Dimensional Fund Advisors’ more than $30 billion of mutual funds to ETFs – an industry first that saw a fund category convert to ETF because so much industry capital was flowing that way.
There is no doubt that not only Citi’s sheer scale but also its breadth and depth are an enormous advantage in this industry.
“I think there are tremendous valuable linkages in this business that are underreported and underappreciated,” Pekin explains. “We are a full-service, institutional bank, period. Clients are starting to be more careful how they direct their service dollars, trying to get the maximum amount of service and liquidity and financing benefit per dollar spent. I think Citi has a competitive advantage because it is a full-service institutional bank.”
It is also global.
“We won a mandate from MUFG for one specific entity for $630 billion of assets,” says Pekin. “We are now using our custody platform to service their clients – this was European capability overlapping with Japanese client confidence.”
Citi has been awarded permission and a licence from the Chinese regulator to provide local asset servicing to onshore Chinese investors, a key win that was the result of a detailed and informed due-diligence process on resourcing and data practices. The bank has already onboarded several clients in what will be a multi-year process.
The big race for us is not to respond to cyclical trends, more to use tech competitively as an advantage to drive unit costs down
Okan Pekin
It closed the acquisition of RBC’s Australian business on January 30, 2020, but Covid meant that the entire M&A trade client migration process, which involved more than 26 customers, had to be done remotely. The last transaction was completed at the end of the past year.
At its investor day earlier this year, Citi’s leadership made clear that the services franchise, which is network driven and has low capital consumption, is one of the cornerstone priority businesses for the bank as it faces a more unpredictable future.
The industry is ripe for consolidation, as profitability is only really achievable with scale. But that consolidation could be some time coming.
“Because the wheels of this industry turn slower than ECM or fixed income, when oil prices go up, they see revenues immediately. But in this business, the trends are much more gentle. But they are there,” Pekin points out.
“If some players are competitively less able to provide the same service or have the right tech, those results are seen over many years. So, I think in the long run there will be more industry consolidation because the ability to use tech requires scale.”
