North American banks posted sizable gains in their international assets under custody in the year ended June 30, a survey by Pensions & Investments shows.
During that 12-month period, 19 banks included in the survey posted a 23.8% rise to $500.09 billion in their foreign assets under custody held for U.S. tax-exempt institutions. For clients worldwide, assets under custody for the 22 banks included in the survey rose 23.6% to $5.49 trillion.
A variety of factors, including acquisitions by global custodians and growth in the size of clients' foreign securities holdings, explained the big rises. For instance, InterSec Research Corp., Stamford, Conn., calculates U.S. tax-exempt institutions had $475 billion of cross-border investments as of year-end 1996. And in this year's first half, new fundings of global/international investments totaled $14.3 billion. That six-month growth was 42% of the rise for all of 1996, but was more than 55% of full-year initial fundings in 1995, according to InterSec.
Growth of foreign investing helped boost the size of international assets under custody for Boston's State Street Bank & Trust Co.
In the year ended June, that bank saw its assets held in global custody for U.S. tax-exempt institutions jump to $117.2 billion from $85.5 billion the year before; that rise pushed State Street into first place, from second.
Robert R. Tarter, senior vice president at State Street, cited strong business growth in the past year. This came from "acquiring new clients with significant allocations to international markets as well as" additional foreign investments from existing clients, he said. Specifically, in the 12 months ended June 30, State Street obtained roughly 15 new U.S. tax-exempt global custody clients. And many of these clients had assets totaling well over a billion dollars, Mr. Tarter said.
Why the growth of foreign investing? "One could build a case that U.S. securities markets have had a substantial run-up and maybe it's time for international markets to do some catching up," he said. Thus, investors "may be trying to time markets, shifting some monies to international investments and directing new contributions" to that category.
Besides the appeal of foreign investing, State Street also benefited from its strengths in global custody, Mr. Tarter suggested. He specifically cited the bank's electronic foreign exchange capability and also its broad network of subcustodians. With subcustodians in approximately 80 markets now, money "managers know that if they are investing in emerging markets, State Street can settle trades and account for assets" for them in those countries, he said.
But State Street wasn't the only bank posting large growth in assets under custody. In the year ended June 30, New York-based Morgan Stanley Global Securities Services saw its global assets under custody for U.S. tax-exempt clients jump to $59.6 billion from $16.5 billion the year before.
Jack Federico, principal in charge of global client services, linked the growth to two main factors: an increase in existing clients' international assets and receipt of global custody assignments from two large global money managers of commingled funds mostly for tax-exempt institutions.
In addition, Morgan Stanley's purchase of London's Barclays Global Securities Services was finalized in April. That deal - which largely involves non-U.S. clients - has so far contributed between $170 billion to $200 billion to Morgan Stanley's total global assets under custody for clients worldwide. As of June 30, Morgan Stanley had just more than $415 billion in assets under custody from clients - substantially up from $132.49 billion the year before.
This year, New York's Citibank remains the leader in assets under custody from clients worldwide. As of June 30, assets in that category hit $1.45 trillion - up from $1.123 trillion a year earlier.
Malcolm Pobjoy, Citibank's global custody product manager-North America, noted Citibank "always has had a strong presence in international markets and developed" its subcustodial network early on. That network now covers 61 countries. Specifically, Citibank has global custodian arrangements in 19 markets of Europe, 11 in Latin America, 15 in Asia, seven in Eastern Europe, seven in the Middle East and Africa and two in North America.
In addition, Mr. Pobjoy cited the bank's technological prowess. For global custody, he said, Citibank uses a similar system in each market. Among other benefits, this enables Citibank to provide "a commonality of servicesacross the network," he said.
Looking ahead, Mr. Pobjoy and others see new opportunities as well as challenges looming in global custody. On the bright side, technological developments are producing a number of positive effects: increasing operational efficiency, reducing costs and ensuring the accuracy of reporting; at the same time, the industry's standardization of reporting reduces the need to customize the process to fit clients' and their vendors' electronic systems.
But significant hurdles also loom for the industry. For global custodians, the biggest ones involve: adjusting their systems both to accommodate the date change in 2000 and the debut of the Euro currency in Europe. Experts believe adjusting for both developments will be costly.
William L. Imhof, practice director of the Alliance of Fiduciary Consultants International Inc., Parsippany, N.J., said bankwide functions overall (not just global custody) "many banks are talking about costs of $100 million to comply with the year 2000 issue;" and adjustments for the Euro are expected to cost "twice as much. So we're talking $300 million" in outlays for total banking functions to accommodate these developments, he said.
Mr. Imhof pointed out "all the banks (already) have major programs under way to comply with both issues." But because of the financial toll such developments will take - among other reasons - more global custodians are likely to acquire competitors or be acquired. Thus, "survivors will be even bigger (than today) and will be looking to make money in value-added services, such as performance measurement, investment support and other areas," he said.
In addition, overall size of international assets under custody also will be important. To be profitable, Mr. Imhof said, players will need at least $100 billion of international assets under custody - and probably more - "to have any viability."