A bad year to have a bad year

State Street’s deal to acquire the Investor Services business of Brown Brothers Harriman has been called off, and that’s not the only bad news for the custodian this year as its revenues have fallen – while its competitors’ have enjoyed an uptick – key personnel have left and the impact of BlackRock’s diversification of service providers continues to be felt in Boston.

This wasn’t how 2022 was originally drawn up. Moving away from the eye of the Covid storm, this year had all the makings of a recovery year, or a ‘post-Covid boom’. Instead, on a macro level, we’ve had war in Europe, economic turmoil and eye-watering inflation. With that, has come soaring interest rates and an uptick in transaction volumes, two factors that benefit custodian banks – yet State Street’s asset servicing business has been the exception to the rule over the past nine months.

Servicing fees decreased 12% year-on-year in Q3, 7% in Q2 and were flat in Q1. Meanwhile, its closest peers have posted double-digit increases over the past six months. While the overall business may have fared more positively, the asset servicing business has been feeling the pinch of BlackRock transitioning assets to its rivals as part of a service provider diversification effort and relatively slow implementations of some of its larger deals. For example, State Street had $233 billion of investment servicing mandates announced in 3Q22 with “servicing assets to be installed in future periods of $3.4 trillion”.

As with all custodians this year, State Street’s assets under custody and administration have dropped; however, the rate has certainly been higher than its closest competitor BNY Mellon. At the start of the year, there was just over $3 trillion between the two, while as of the end of Q3 2022, there is now around $6.5 trillion.

Outside of the BBH deal, State Street Alpha has been the custodian’s other focus, as it looks to expand the relationships with its existing middle- and back-office clients. The amount of love and attention Alpha gets from its most senior execs on earnings calls does not go unnoticed, and there have certainly been some success stories, even if you could argue that progress is somewhat slow. The most recent count of Alpha clients we could find was 20 signed, with 12 live as of the end of 2Q22.

How you analyse this depends on what angle you are looking to support; some have noted that progress has been slow, implementations lengthy, and the uptake seems to be stagnating. Given this has been pitched as State Street’s big hope, one could argue it’s not meeting expectations. However, compared with its peers, it could be said State Street is having more success than its closest competitors. Under the theme of ‘front-to-back servicing’ – which was all the rage back in 2019 – has anyone had better uptake than 20 clients?

Another pain point for State Street has been in losing key personnel. No loss has been felt as much as the departure of Nadine Chakar, head of State Street Digital – the division exploring cryptocurrencies, central bank digital currencies (CBDC) and tokenisation. Outside of ‘front-to-back’, digital assets have been held up as a bright spot in the future of asset servicing, enabling incumbent custodians to capture new revenues, bring new efficiencies (through tokenisation) and benefit from a new asset class. For State Street, many of its hopes were pinned to Chakar at the helm of the digital assets team, and her departure leaves a notable knowledge gap and leadership void in the role. While an interim appointment has been made, the advertising of the role around the industry suggests a search for a successor remains ongoing.

Elsewhere, there have been some other notable departures – though nothing outside the usual employee turnover to suggest any kind of internal issues – including Stephen Johnston, CEO of its Irish entity International Fund Services Ireland; Daniel Cheever, head of global services, Australia; Kevin Hogan managing director, head of product, alternatives EMEA; Akbar Sheriff, lobal head of custody and digital client experience; Adam Sporn, senior salesperson for the firm’s Enhanced Custody program; and Kim Newell Chebator, head of global clients division in Asia Pacific and EMEA.

To provide a fair balance to the revolving door angle, State Street did announce some impressive hires, including Daniel Hickey as its new global head of network management; Michael Knowling as head its global clients division (GCD); Jesse Cole as global head of its private markets segment; and multiple hires across its digital and technology teams.

On the securities lending side of the business, Global Custodian reported in May that account set-up errors from the bank resulted in some of its clients’ assets intended to be eligible for loan not showing up as available, in some cases for up to two years. The issue occurred for a small number of clients where incorrect settlement locations were listed for four markets. At the time, the custodian confirmed the error to Global Custodian, adding that the impacted clients’ assets in the relevant jurisdictions represent less than 0.04% of available lendable assets in its securities lending program.

Even though there have been some positives for State Street in 2022 – notably in the ETF servicing space, Australia, fintech partnerships and the launch of a new peer-to-peer financing platform – overall this has been a year to forget for the Boston-headquartered asset servicer. Time and money poured into the BBH deal has gone to waste, the gap between itself and BNY Mellon has widened, and questions surround some of its most aspirational securities services plans. There will likely be another split of its BlackRock ETF assets – this time in Europe – among its peers in the coming months, with State Street’s share again diminished, while the organisation will likely feel the pain of the BBH failed deal in the short-term.

But the New Year provides a fresh start for the custodian to put the past 12 months behind it and write a new narrative for 2023.

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