NEW YORK - Deutsche Bank's global custody division has been hammered in the last several months by client defections, punctuated by the loss in November of the $17 billion Verizon Communications account to rival Mellon Financial Corp.
In the past year, Deutsche bank has lost at least $127 billion in global custody assets from five clients.
Against a backdrop of lingering financial scandals - most of which it inherited with its 1999 purchase of Bankers Trust Co. - along with employee turnover and dwindling support by consultants, Deutsche faces an uphill battle in global custody.
Indeed, some industry executives predict the German-owned bank might consider exiting the U.S. global custody market on the heels of the Verizon loss.
But Deutsche officials contend the bank has a strong U.S. base and has no plans to abandon the global custody market in the United States to focus on Europe and Asia, where it dominates.
"The bank has made a commitment to be in the global business," said Ken Kennedy, Deutsche Bank's managing director and head of global securities services for the Americas in New York. "In the Americas we have made large investments in technology, accounting platforms, process improvement and people. Deutsche Bank is a global organization. Our model is to have a robust U.S. presence and that hasn't changed. ... You are either in the U.S. business or you are not a global player."
But Jurgen Marziniak, head of global securities services at Deutsche Bank, Frankfurt, Germany, said Deutsche is committed to increasing its global custody business around the world, more likely through acquisitions than through new customer relationships (P&I, Oct. 16).
Mr. Kennedy said there is "no validity" to claims Deutsche would leave the global custody business in the U.S. market. "We didn't come in to clean up and then sell it; that's not the agenda here." A new management team was brought in, he said "to ensure the business moves forward and remains an integrated part of our global banking platform."
Up to Frankfurt
That type of response is understandable, but didn't satisfy some doubters. Another financial executive familiar with both Bankers Trust and Deutsche said the ultimate determination regarding Deutsche's global custody business will be made in Frankfurt, not in New York. "The investment bankers are now running Deutsche. When they look at the technology spending which will be required and one-day trade settlement requirements (required by 2002) and the problems of competing in the pension fund business, they may not want to invest that much money or time," he said. "The people running the (global custody) business may have no intentions of getting out, but Frankfurt is calling the shots."
The loss of the Verizon business was particularly difficult for Deutsche, which fought hard to win the account that was formed as a result of the merger between GTE Corp., Stamford, Conn., and Bell Atlantic Corp., New York. GTE was one of Deutsche Bank's largest custodial clients; Bell Atlantic used Mellon.
In its efforts to woo Verizon, Deutsche brought in board members from its home office in Frankfurt, to lobby company officials, according to a source present during the evaluation process. As a last-ditch effort, these same sources said, Deutsche proposed splitting the Verizon account, with Deutsche providing custody for the international component and Mellon handling the domestic custody duties.
"Deutsche brought in several board members to pitch the business and they fought hard in a no-holds-barred bid for Verizon," said the executive present at the presentations.
T. Britton Harris, president, GTE Investment Management Corp., which oversees the Verizon assets, said Verizon conducted an "extensive review" of Deutsche and Mellon before selecting Mellon. He expects Deutsche to remain a viable player in the U.S. global custody market.
"We had to make our decision now ... and we told (Deutsche) that if we had to make the decision two years from now, it would have been more difficult to make," he said. "Deutsche is trying to focus more attention on the master trust (custody) business and is resurrecting its technology. They have some good plans in place. If they are able to do it within the next 24 months, Deutsche will be back on the scene as a first-tier player in the master trust business."
Since nearly 60% of the Verizon assets already were with Mellon and Mellon's systems and operations are in place now, the decision was made to move all global custody business to Mellon.
The Verizon loss was the latest and largest for Deutsche. Sources said the bank has lost 18 of the last 21 contracts that were up for renewal. Custody clients dropping the firm include the $5.5 billion Teachers' Retirement System of Oklahoma, the $260 million Texas Tech University endowment, the $80 billion New York State Teachers' Retirement System, and the 16.5 billion ($24.8 billion) U.K. Railpen pension scheme.
Mr. Kennedy declined to discuss the Verizon business and flatly disputed the figures on client losses, saying they are "not accurate." He refused, however to discuss actual client defections.
$4 trillion under custody
According to figures provided by Deutsche, it has nearly $4 trillion under custody. At the end of 1998, however, Deutsche Bank reported $2.7 trillion and Bankers Trust, $2.3 trillion - for a total of $5 trillion.
Adding to its difficulties, some large pension consulting firms have stopped including Deutsche Bank in new client searches.
Mark Guinney, investment consultant at Watson Wyatt Consulting, San Francisco, said Deutsche hasn't been included in global custodian searches for his firm's U.S. clients for more than a year. He said several of his clients have terminated Deutsche because of "problems" surrounding the acquisition of Bankers Trust and the bank's restructuring and consolidation afterwards.
"We do, however, look at them as significant players in Europe. They are strong players there and are included in a number of searches there," said Mr. Guinney. He said Deutsche is included in "one or two" of his firm's custody searches weekly in the United Kingdom.
The legal problems at Deutsche and, before the merger, at Bankers Trust continue to haunt the German financial giant.
Memories of a derivatives scandal at BT involving Procter & Gamble in the mid-1990s won't go away. In September of this year, Bruce Kingdon, a former partner and managing director in the BT client processing services division, pleaded guilty in federal court to conspiracy and five counts of making false entries in the books of a financial institution between 1993 and 1996. Charges are pending against other former BT employees.
Last year, Bankers Trust pleaded guilty to charges that senior officers and employees falsely recorded millions of dollars in unclaimed checks and other customer credits owed to customers to pad the bottom line.
A consultant at another major investment consulting firm, who wished to remain unidentified, said the consulting firm does not include Deutsche in its global custody searches for many of the same reasons as Watson Wyatt.
"The bank didn't reinvest in systems and fell behind in consolidating overlapping platforms until recently. They started moving a lot of their operations and control to Europe and that sends me a signal that you want to serve the non-U.S. market," said the consultant.
A plan sponsor that terminated Deutsche said customer service was the primary reason.
"We weren't real happy with their customer service. They had just gone through a lot of changes and we thought they would get things corrected. But there were just too many personnel changes the entire time that we used them," said the plan sponsor, referring to the period after the merger.