In January this year, BNP Paribas Securities Services rolled out its agency lending services in the U.S. While the rest of the industry reels from the impact of the financial crisis, Patrick Colle sees this impact as both ying and yang.
“The industry has been affected by regulation, leading to a downward trend, but as we enter new segments and geographies where we were not before, there is an upside potential,” he says. While the crisis has hit securities lending and FX revenues, the provider’s moderate presence in this space historically means it has not been as badly affected as those competitors for whom securities lending was a core business.
“We’ve always been extremely cautious in terms of the way we run our securities lending program in the sense we never ran into cash reinvestment problems, so we never got impacted by those issues,” says Colle.
“Today the [trend for] securities lending revenue globally is downward but to a lesser extent for us because we never pushed the activity as much as others. Agency securities lending revenue for us is growing because we are starting from a lower base.” As a service alongside custody, BNP Paribas has made a concerted effort in the last two years to sell a combined product offering and today has some upside from that.
While the downward trend means that securities lending providers have a smaller pot to play with, institutional investors are choosing their lending programs with their custody providers when periodically reviewing their assignments.
“Regulations with liquidity and capital constraints have a dampening effect on activity, but as you go into geographies and client segments where you were not previously, by definition you go from zero to upside,” says Colle.
“Regulations like EMIR, Dodd Frank, trade reporting, AIFMD registrations create a profound change in the operating model for our clients, as well as bottlenecks because everyone comes forward to register two weeks before the deadline. Both are an opportunity to serve our clients and that’s where most of our focus is.”
The requirement for Alternative Investment Funds to have a depository bank has prompted BNP Paribas expand its geographic in this space in the last 12 months. It has increased the number of locations where it offers depot bank and trustee services to 12 in Europe and two in Asia. This year alone, the provider has rolled out these services in the Netherlands, Switzerland and the U.K. for funds domiciled in those regions.
It has also levered acquisitions such as the depot bank business of Commerzbank last year. Colle comments on the rationale for this: “It’s a very good example of how regulation can influence your strategy.”
While benefiting from the impact of regulation on its clients, Colle does not deny the impact it has had on costs. “Yes, Basel is increasing the level of capital required, but it’s still a return on equity business, which typically means lower profitability and lower margin, but once you bring it down to the capital that you use, which is also very small, it gives a high ROE; the business is based on scale and finding operating efficiencies,” he says. “So the margins and profitability may not seem very high, but you need to look at the whole picture, which is the level of profitability brought back to the level of capital used. Yes Basel III will add some amount of capital but not to the extent that it will change the ROE.
“We have an efficiency program to consume as little risk weighted assets as possible and counter some of the effects of Basel through a risk management methodology, and in terms of costs, that’s a continual program. In terms of our businesses there is no option but to seek to automate more, buy newer technology platforms, reduce unit costs and to increase volumes.
“In this regard we are very much leveraging the two operating hubs we have developed over the last two years in Lisbon and Chennai, (India), to benefit from scale, low unit costs and high service quality. We have not shared the numbers, but over the past year the ROE on this business has gone up. It shows it is possible, using risk management to reduce capital and unit costs, increase your volumes and grow your business. It’s not impossible, though not in a dramatic way, to increase your return on equity.”
Furthering the low costs mantra across the industry, BNP Paribas has been diversifying its business mix in the last few years, another critical component of its strategy, servicing buy-side institutions including asset managers and asset owners as well as sell-side institutions such as broker-dealers, banks and financial intermediaries, issuers and corporates. “The beauty of that is that when the environment changes and there is market volatility and turmoil you have a mitigating effect: market valuations cause the buy side to suffer temporarily because assets come down. At the same time, because there is more volatility in the market, the on-transaction side, and therefore the sell-side component of the business, will typically grow,” says Colle.
“So every single year for the past three years we have grown, and we have continued to invest steadily. This diversified mix has allowed us to have more stable earnings and revenue mix than maybe some others. So that’s the long-term answer.
“The second part of our strategy is over the last three or four years we decided to go global and have a more geographical mix. One reason for that is that our clients are global, and we want to be able to serve them wherever they go. The other reason is that if one region is suffering you may have business in other areas or an offsetting element thanks to that strategy.” Indeed in the quarter, nearly half of BNP Paribas’ mandates came from outside Europe, including Asia Pacific, Latin America and the U.S., compared to 90% not so long ago. And it is currently rolling out its collateral management platform in the U.S.
“We have been working a lot on implementing these growth engines in these different regions over the last few years, including launching local custody in the Asia-Pacific region, as well as in Brazil and Columbia this year, and we a massive migration in the U.S., where we launched local custody services last year. We are starting to see the benefits of these investments coming in through mandates in these markets. So the growth engines that we have taken a lot of time to implement are now starting to generate new business. And to illustrate that, Asia Pacific, as one of the growth regions, grew at more than 20% last year.”
In addition to diversifying its business model, BNP Paribas Securities Services has a joint venture with its investment bank parent, implementing its collateral agency servicing platform to provide listed derivatives clearing and execution. “We will look to extend that harmonized service for OTC derivatives,” says Colle.
Going forward, BNP Paribas will continue to invest in innovative new solutions as clients’ needs evolve courtesy of regulation, he says. For example, the provider has extended its risk management and attribution solution to iPads and adapted it to provide Solvency II reporting for insurance companies and asset managers. “For us that’s an important element of differentiation and development. In some markets, like Hong Kong, it was us who introduced the concept of third-party clearing,” he says. “In the U.S. we are looking at combining clearing and custody. For TARGET-2 Securities we are working at assembling some products around settlement efficiency, cash management and around risk management. We have invested over €200 million in the past five years on preparing new platforms and new services for T2S.”
Colle believes the future of custody lies in globalizing service models rather than looking to re-price those services. “You have to have the scale to be efficient and competitive in a business that always generates, innovates and adapts its costs because of regulation and market changes. You need to constantly create efficiencies by optimizing your platform and growing your volumes and grow organically and through acquisitions. You have unit costs, you have volumes, you have clients, and I’m not sure re-pricing is a notion that exists, because I’m not going to tell clients that I am increasing prices 20%. So either you decide to be in this business and you have the means to be in it or you don’t.”
The Future of Custody: BNP Paribas’ Patrick Colle on Going Global
In the second of a series of interviews with senior custody executives, Global Custodian talks to Patrick Colle, chief executive officer of BNP Paribas Securities Services, about the provider’s long term commitment to the industry and how it seeks to deliver value through a globally diversified strategy.
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