The big keep getting bigger in the trust and custody world.
A series of large bank mergers and acquisitions have helped large national banks boost their position as the top providers of master trust and custody services to institutions.
The assets of the top providers grew faster than the total assets for all the custodians/trustees listed in the survey, a group which in itself appears to be shrinking, according to Pensions &
Investments annual trust and custody survey.
The 23 banks reporting in this survey said their total trust and custody assets increased 13% to $4.3 trillion, from $3.8 trillion in 1995, the same growth rate the universe showed in 1995.
State Street Bank & Trust Co., Boston, remained the top trustee and custodian, increasing its U.S. tax-exempt assets by 20% to $998.1 billion from $833 billion a year before. Mellon Trust Corp., Pittsburgh, was second again with $745.2 billion in master trust and custody assets, a gain of 19% from last year's $623.6 billion total.
The number of banks reporting was down from last year's total of 28, partly due to mergers and the exit of several players from the business.
Chase Manhattan Bank Corp. and Chemical Bank Corp. - which were sixth and eight, respectively, in last year's survey - merged under the Chase name. But the merged company remained in sixth place with $369 billion in assets. The post-merger Chase had 16% fewer assets than the combined Chase-Chemical totals for last year.
Wells Fargo & Co., San Francisco, replaced First Interstate Bank, Los Angeles, among the top 10, with $71 billion in master trust and custody assets. The two banks merged earlier this year; Wells Fargo, which had previously not been a large player in trust and custody, also gained $2.7 billion in new business.
NBD Bancorp, Detroit, which was 11th in last year's survey, announced last summer it was withdrawing from the institutional custody business. NBD, which merged with First Chicago Corp.,
Chicago, into First Chicago NBD Corp., recently named Northern Trust Co. as preferred provider of master trust and domestic institutional custody services for its clients. Chicago-based Northern Trust announced plans to open an office in Detroit to facilitate its efforts to convert NBD clients; it expects to begin taking clients who chose Northern Trust in the fourth quarter and complete the transition in the second quarter of 1997.
Northern Trust structured the NBD transition as a marketing agreement, because there are no guarantees that the clients will automatically move to a new provider, said Sheila Penrose, executive vice president and head of corporate and institutional services at Northern Trust Co. By not entering into an outright acquisition of the custody business, Northern Trust can concentrate on converting those clients for whom Northern Trust is a good fit, rather than spend resources chasing the entire NBD client base, she said.
Even before the NBD announcement, Northern Trust was third in new business picked up, due in part to the departure of its local rival, Harris Bank, Chicago, from the institutional custody business and from its acquisition of manager of managers RCB International Inc., Stamford, Conn.
"We've been a beneficiary of the consolidation in the (custody) business. We've gained some business from every player who's left the business or sold," said Ms. Penrose. "You can't take it for granted that the business will go to whomever bought it."
In its recent quarterly earning report, Northern Trust's posted trust fees from corporate and institutional services - the unit including custody, investment and advisory services - rose 21% in the third quarter to $74.1 million, compared with $61.4 million during the same period last year. RCB accounted for $6.9 million of that growth and, without RCB acquisition in October 1995, revenues would have increased 9% during the quarter.
Northern Trust also took advantage of Harris' exit, picking up several local and regional funds as clients, including the Illinois Teachers Retirement System, Springfield. Harris Bank sold its securities custody and related trustee services business for large institutions to Citibank in January. Citibank's total trust and custody assets grew to $245 billion, a 26% increase from last year's $195 billion. Citibank was also one of the top asset gainers, with $22 billion in new business.
U.S. tax-exempt investors moved $399.8 billion in assets among master trustees and custodians in the 12 months ending June 30. Of that, 84%, or $338.94 billion went to five banks, all of which were among the largest in the survey: The Bank of New York, State Street, Chase Manhattan, Northern Trust and Mellon Trust.
Sponsors are leaning towards large providers for several reasons, say custodians, including price advantages, a stronger investment on technology and a feeling that the larger organizations are more strongly committed to the business than smaller banks. They point to the departures of large regional banks such as NationsBank Corp. and First Chicago NBD as a sign that even the super-regionals have decided they can't compete in an environment that favors huge global players.
Sponsors also want to see a strong commitment to the custody business, through investments in technology and personnel, said Ms. Penrose. She noted that two-thirds of Northern Trust's revenues are now derived from master trust and custody activities, which she said is as an indication of the company's commitment to the business.
Only a handful of the top providers can afford to provide the type of sophisticated technology that the sponsors want, coupled with global experience and networks to handle a growing interest in non-U.S. investing at a competitive price, said Thomas Perna, executive vice president of The Bank of New York.
Sponsors are looking at custodians for a variety of multiple assignments, wrapping securities lending, foreign exchange, cash management and funds transfer services with information delivery on the services, said Mr. Perna. The players who had viewed the master trust and custody business as strictly a business of securities custody are the people who are making the decision to get out, he said.
The added-value services had been required among the large pension plans for some time, but the requirement is now spreading to midsized and smaller plans, said Paul Maregni, senior vice president at Mellon Trust. As those plans become more sophisticated and begin to make non-U.S. investments, they are requiring a wider range of added-value and global services from their custodians, he said. Banks not willing to make the reinvestment necessary to provide the services are leaving, he said.
"Things are getting more complex in terms of the things they're doing. . . . You find you not only need the basic systems capability to process those trades, but you also need the PC workbench to deliver that information to the client in a flexible format on a timely basis," said Mr. Maregni.
"Custody is not the business anymore," Mr. Perna said, "the business is being able to provide information in an ever more timely fashion on a global basis. Nobody talks about the custody aspect of it. The ability to do that part of the business is a given."
Bank of New York had an impressive run-up in assets: a 39.3% increase to $535 billion, a 39% increase over last year's $383.8 billion. The bank, which has been on a strong acquisition and growth mode in recent years, leapfrogged over Bankers Trust and Northern Trust to third place from fifth place last year.
Bank of New York doubled its new business in 1996, aided by its recent purchases of the corporate trust business of NationsBank and the custody businesses of BankAmerica Corp. and J.P. Morgan & Co. Thanks in part to those acquisitions, the bank recently reported that securities processing fees rose by 60% in the third quarter to $164 million, compared with $103 million in 1995, while trust and investment fees rose 28% to $42 million from $33 million in 1995.
Bank of New York was the top new business gainer, with $151.2 billion in new master trust and custody business gained from 284 new trust clients and 298 new custody clients. That doubles the pace of new business acquisition from last year's $71.4 billion.
Some of the new business changing hands this year included both pension funds and their investment managers, many of whom switched the custody of their mutual funds and other products.
Bankers Trust won new business from the Oklahoma Public Employees Retirement System, New Haven (Conn.) Police and Firemen's Pension Fund, New Haven (Conn.) Employees' Retirement Fund, Acme Metals Inc. and Lazard Brothers Asset Management among others for various trust and custody positions. State Street Bank was hired by the Washington State Investment Board, Hartford (Conn.) Municipal Employees Retirement Fund, ITT Hartford Group Inc., Janus Capital, Selected Investments in Financial Equities Trust Fund, the International Brotherhood of Electrical Workers, the Massachusetts Pension Reserves Investment Management Board and Massachusetts State Teacher's and Employees' Retirement System for trust and custody assignments.
The San Francisco City & County Employees' Retirement System, Blue Cross Blue Shield of Tennessee, the Staffordshire County Council Superannuation Fund and GH Asset Management, London, were among the institutions hiring Northern Trust for custodial and trust assignments. The Texas Employees' Retirement System, Van Eck Associates Corp., Threadneedle Asset Management, New Ireland Assurance Co. PLC, and United Asset Management Inc.'s UAM Funds unit chose Chase Manhattan Bank.
In the future, the shift to larger providers will continue, and with it, custodians will forge a stronger connection with their clients, including some semi-consulting assignments, say custodians.
It is a natural progression, said Michael Beasley, managing director of Strategic Investment Solutions, San Francisco a consulting firm. Their large capital investment in systems and hardware allows custodians to provide information in a variety of formats.
Some custodians are capitalizing on their ability to provide "commodity-type" consulting services such as performance measurement, d