The end of the first quarter marked a tough start for the new boss of State Street, when the Boston-based global custodian reported a 12% fall in its asset servicing revenues on Tuesday.
Poor market conditions and muted client activity hit the broader global custody industry, not just State Street. Fee pressures on both providers and their buy-side clients, combined with increased competition in the sector have created an unfavourable environment.
State Street is also facing potential regulatory scrutiny from the US Securities and Exchange Commission (SEC), which stated in February that it is in talks with State Street over a potential settlement following allegations the bank had overcharged certain custody clients.
But while these factors have no doubt presented challenges to Ron O’Hanley at the start of his tenure as CEO, he has wasted no time in stamping his own mark. Formerly president of its buy-side arm State Street Global Advisors (SSGA), O’Hanley made a number of changes to his senior management team, appointing front-office executive Lou Maiuri to the role of chief operating officer (COO). He also created a number of new roles, including head of global delivery and head of global clients division.
One State Street
O’Hanley has also pursued the roll-out of the ‘One State Street’ model, a fully integrated front-to-back office asset servicing platform which combines Charles River Development (CRD) and the bank’s own traditional custody services.
The expansion into the front-office gives State Street access to a new $8 billion asset pool at a time where the traditional custody industry is under immense fee and market pressure.
Speaking exclusively to Global Custodian, O’Hanley notes that despite the present environment, there is an opportunity to become the only custodian with a fully integrated front-to-back service offering.
“We can grow faster than the industry overall,” he says. “The environment is very difficult – you have fee pressure, a lot of competition, muted client activity which affects flows – so all of those pose short-term economic pressures. But those same pressures are on our clients, which is creating an infrequent opportunity to provide more services, capture more of the wallet, and demonstrate our superior value proposition.”
The main proposition of O’Hanley’s front-to-back vision is simplification – be it for pre-trade processes all the way to reporting – with a single master file as opposed to carrying out multiple reconciliations along the value chain.
This vision seems to be resonating. O’Hanley highlights that at the end of the first quarter, State Street had approximately 110 opportunities being pursued by its sales team, and anticipates announcing a number of client adoptions of the front-to-back office platform in 2019.
Turning around securities finance
While promoting the front-to-back office offering, one of O’Hanley’s pressing concerns is turning around State Street’s waning securities finance business.
During the first three months of 2019, the business saw revenues decline by 16% year-on-year. But it has been a unit which has consistently declined every quarter.
In its quarterly earnings release, State Street attributed the fall in revenues for the business to a balance sheet repositioning initiative it enacted between the third and fourth quarter of last year.
But State Street also let go four of its most senior securities finance executives, including its EMEA head of agency securities lending and its global head of trading for agency lending.
A spokesperson said at the time described this as part of a “restructuring… to move towards a more integrating and agile model” providing stronger client and counterparty coverage as well as contributing to its front-to-back office platform.
But despite these developments, O’Hanley believes the bank performed better in this sector than its competitors.
“The early part of the quarter was quite muted then March picked up,” he observes. “The pipeline is strong, and we expect to see more activity with a rush of IPOs, which spurs securities finance activity.”
Another area of attention for O’Hanley is the bank’s biggest, most important clients. While State Street has been reviewing its client coverage model since 2016, O’Hanley took a major step forward with the One State Street model.
This will include the implementation of shared goals and measures that track mutually-determined priorities for its 60 largest clients that make up half of the bank’s overall revenues.
“We determined those clients interact across State Street for seven or eight different services, and they need a model that ensures we continue to bring subject-matter expertise as they broaden their relationship with us,” says O’Hanley.
This has led to the newly created global clients division headed up by Donna Milrod – the US securities veteran and former deputy chief executive of Deutsche Bank Americas – responsible for cross-enterprise solutions and insights into the company’s global and most complex clients.
Within this new division, each of its largest clients is assigned their own client executive, providing enhanced accountability. O’Hanley says that around two-thirds of its biggest clients have now been allocated their own client executive.
The creation of the new unit reflects the changing nature of the asset management and asset owner community, with the latter another growth target for O’Hanley. This is because a large number of pension funds and insurance companies are undergoing a process of insourcing, whereby they take on a number of key functions a traditional asset manager would otherwise handle.
Asset owners are becoming increasingly sophisticated in their requirements, and O’Hanley says this opens up another opportunity for State Street to increase their market share.
“We’re taking that offering that we have for the high-end asset manager and tailoring it for those asset owners,” he says.
In addition, O’Hanley has established a new pricing and executive deal review committee to evaluate pricing decisions and the implications they will have on the firm. The committee consists of 13 senior leaders, and will meet at least once a month. Individual client opportunities are to be considered together rather than on a geographic and/or business unit silo basis.
The deal review committee met five times in the first quarter and is currently reviewing around 30 transactions. “It is a committee that can get involved early enough and intervene on pricing decisions and business acceptance issues,” adds O’Hanley.
“When we are repricing, there is new business coming over so we need to know if they are aligned. Often times, minor change to the way the client does business can lead to big changes to pricing and to their risk profile.”
O’Hanley has clearly set out the four pillars that will define his first year as CEO of the Boston-based bank. Increased synergies with Charles River and the development of its front-to-back platform will certainly create a new definition of what a global custodian can do.