This is another example of the ongoing consolidation among asset servicing providers. And Germany is one of the most important locations for this process in Europe. Following Caceis’s acquisition of HVB’s custody business in 2008, the world’s largest global custodian has now taken over one of the leading custody and depository banks in the country. The German subsidiary that will emerge at the end of the transaction will focus on asset servicing, which comprises the three sub-areas of depositary banking, sub-custody and fund services. The small, flexible service boutique and the large powerful global player: will the national institution feel comfortable under the wing of its new international parent?

Why Germany?
Germany is Europe’s leading economy. In global terms, the country came fourth in 2009 behind the USA, Japan and China, with economic output totalling Ä2.4trn. What is more, Germany still offers enormous growth potential when it comes to securities holdings, despite positive market trends (in the last three years the DAX outperformed the MSCI World Index by around 10 percent).

There are many reasons for this, ranging from the increasing importance of private retirement provision through the financial market crisis, which led to assets being repatriated to Germany, down to a high savings ratio by global standards of 11.2 percent (H1 2009).

For example, the number of state-subsidised retirement pension contracts (known as “riester pension products”) has steadily increased in recent years. Overall estimates are that approximately 36 million people are entitled to claim the subsidies, but that only 13 million or so have signed such contracts to date. Of the various forms of product available, both unit-linked and classic insurance products have an effect on German capital market volumes. Although sales of the unit-linked version got off to a relatively slow start when the new retirement provision products were first introduced in 2002 (just under one million unit-linked contracts had been signed by September 2006), this figure had risen to 2.5 million by September 2009.

In addition, a clear increase in pension obligations is expected in 2010 as a result of the first-time application of the Bilanzrechtsmodernisierungsgesetz (BilMoG – German Accounting Law Modernisation Act). According to a study by Allianz Global Investors, the rise may be anything up to 75 percent. Although the funding level of the obligations differs, a corresponding rise in provisions at companies is highly likely.

In addition to these reforms, the financial crisis has also led to capital being repatriated to Germany. According to a study by consultants Kommalpha Institutional Consulting, cash inflows at German funds in the first half of 2009 amounted to Ä6.2bn, while Ä5.4bn was transferred out of Luxembourg funds to Germany. This is due among other things to a renaissance of interest in conservative investment products, which traditionally are launched more frequently in Germany.

All these factors favour an expansion by foreign companies on the German asset servicing market and might lead to a renewed increase in consolidation amongst asset servicing providers here.

Consolidation
Consolidation remains one of the dominant topics in the asset servicing sector. However, the last eighteen months since Caceis’s acquisition of HVB’s custody business have been quiet in Germany. The only slight revival of interest came in early summer 2009, when a number of market players commented on the future of depot banking. Although they forecast a decline in the fifty or so depot banks today to between ten and twenty, no deeds followed these words for the rest of the year. Recently, a number of voices even suggested that consolidation in the sector might have already run its course.

However, a look at the various market surveys relating to the custody and depot banking business shows that this cannot be the case. In the sub-custody area, Germany still has six service providers – a large number in international terms. There are also a large number of players in depot banking who together account for significantly less than five percent of the market. A look back at developments over the past decade reveals that the number of German providers has declined in favour of the large international players: among others, Dresdner Bank and HVB withdrew from the German sub-custody market, while Caceis entered it, for example.

One of the main drivers of consolidation over the past three years is certainly increased risk awareness on the part of customers, who are increasingly unprepared to accept service providers who cannot offer adequate capital backing or corresponding ratings, or who cannot call on the support of a financially strong parent.

Nevertheless, smaller providers were able to survive the financial crisis and to increase their market share, as some of them are able to clearly differentiate themselves from their large competitors in other areas that play an important role in customers’ decision-making processes. These include personal contacts, greater flexibility and local market expertise. Local providers have excellent networks to influence the regulatory framework for the German market in the interests of their customers, which enables rapid communication beyond the boundaries of their own organisations as well as internally.

As with other financial services providers, a division of the market for asset servicing into small, local boutiques versus large international providers seemed to be emerging.

A good fit?
Against this backdrop, the takeover of BHF Asset Servicing by BNY Mellon looks at first glance like a clash of cultures. However, a closer look reveals that the two companies – however different they may be – also have similarities. Both organisations are dedicated to uncompromising customer orientation.

BNY Mellon has had a successful relationship with BHF-BANK for more than seven years and this transaction is a natural evolution of that partnership.

In the area of sub-custody, BHF Asset Servicing has supported BNY Mellon as its German sub-custodian for many years. In addition, they set up the highly successful distribution joint venture BHF BNY Securities Services GmbH, which marketed the two companies’ global custody and depositary banking business in Germany.

By acquiring the BHF Asset Servicing subsidiary Frankfurter Service Kapitalanlage-Gesellschaft (FSKAG), BNY Mellon is also purchasing one of the leading fund administrators on the German market.

There are relatively few overlaps – at least in terms of products – with BNY Mellon’s current product portfolio in Germany.

In addition to BNY Mellon’s experience in how to ensure the optimum integration of acquirees, it is this point in particular that suggests that BHF Asset Servicing’s corporate culture will play a key role in the future business. This will include short communication channels and in particular the continued provision of customised solutions for customer requirements.

In addition, the merger will overcome the three major hurdles to business development: a strong commitment to the asset servicing business, adequate capital backing and a good rating. After the turbulence surrounding its former owner Sal. Oppenheim, BHF Asset Servicing will now be able to rely once more on a strong parent and its professional background.

The next step
The goal of the two companies undertaking the merger is to offer highest quality. This means that the focus in the coming months will be on providing continuity of service levels and among employees. At the same time, comprehensive, detailed analyses will be made. The two companies’ IT systems will be compared with each other and evaluated. The staff of BHF Asset Servicing, FSKAG, the Frankfurt units of BNY Mellon and the parent company will get to know each other. There is a lot to organise.

In our opinion it is highly probable that this step towards the consolidation of the German asset servicing market will be followed by others. Among the sub-custody service providers, for example, Commerzbank’s commitment to sub-custody would seem at least to be open to question. Dresdner Bank, which was recently acquired by Commerzbank, sold its sub-custody business to Deutsche Bank back in 2003.

At present, an estimated 50 players are still active in the area of depot banking services. We expect consolidation to reduce this number to ten to twenty in the medium term. The IT investments required are constantly rising, particularly in view of the steady stream of new statutory requirements. This means that current providers are being forced to examine whether this business area will continue to be a lucrative one for them, despite the cross-selling effect with other products.

However, it is not just Germany that will experience further consolidation: we will see this happening throughout the world, and particularly in developed markets. In contrast to many other sectors of the economy, the market for asset services moves at a relatively moderate pace: developments occur over medium to long time frames. In the 1990s, organisational development focused on a return to core competencies. To date, this process has not been completed in the asset servicing sector and it will continue to occupy us in years to come, both in Germany and throughout the world. BNY Mellon’s new subsidiary is only part of the new family groups that can be expected.