Growth in Asia

Dominic Hobson chaired a panel of regional Asian market leaders at the recent Global Custodian Awards for Excellence in Hong Kong. I was interested to note the reaction to a question about the source of future growth in custodian revenues.

Dominic Hobson chaired a panel of regional Asian market leaders at the recent Global Custodian Awards for Excellence in Hong Kong. I was interested to note the reaction to a question about the source of future growth in custodian revenues.

In Europe the focus of the answer would be innovation and new products. In Asia the primary focus was the growth in markets. Both regions have most likely got the answer right, but I suspect that they have also underestimated the challenges.

In Europe, the main area of innovation is said to be around collateral management and data services. The collateral management product is difficult, for it encompasses a series of sub-products, including efficient market-side collateral allocation (putting up the required collateral of each marketplace), collateral transformation (such as debt to equity swaps), classical stock borrowing and lending and collateral tracking across multiple platforms. In other words, it is a technology-rich, skill-intensive global product. And beyond the larger players, few have the reach or resources to match the business needs of their global clients.

Data services are another technology-rich offering and highly dependent on sophisticated analytic, reporting and data warehousing capabilities. The challenge arises in charging for such services. Clients will argue that the concentrator has the data because they have executed transactions on assets they hold as custodian, administrator or prime service provider. As the client has already paid for the transaction services, there will be resistance to pay for receipt of data, and even for restructuring it into the format required for regulatory reporting or management information purposes.

Asias dynamic markets could indeed be the savior of the regional players, but there will be no linear alignment of market growth and commercial returns. On the one hand, growth will definitely come from the further development of a regional funds market. The greatest potential lies in pension fund developments, given the fast growing mid-age to elderly segment among the middle classes in the region. But gaining a footprint in that sector without the right local structure is difficult. There are also risks that regulation in the different jurisdictions will prevent as many regional synergies in technology and process as many hope.

The idea that increased capital formation in the different markets, market appreciation as a result of faster than world average GDP growth and increased asset allocation by cross-border investors will drive added revenues is also partly flawed. In this day and age of global cost cutting, unit prices will shrink as the market scale increases. The greater the dollar value of the sub-custody bill, the more frequently and radically it comes up for review. Overcapacity in markets around the world is leading to dramatic fee attrition, and the regional Asian fee levels remain at a premium to much of the rest of the world. That, and the continued deleveraging of the investment banking market, is going to prevent as great a new revenue bonanza as many hope from this source.

Asia, however, still looks far healthier than the rest of the world. The growing presence of many global players on the ground in the region is proof of this, as well as an added competitive challenge to established players. Internalization of own business, cross-selling by global new entrants into an established client base and universal solutions at lower prices just add to the inevitability of increased competition in Asia.

But that can be tolerated in a growth market. Pity the others. For the rest of the world is still stuck in a rut!

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