The Future of Custody: Harry Samuel on RBC Investor & Treasury Services’ New Strategy

It has been almost two years since the Royal Bank of Canada (RBC) unveiled its new face for investor services by creating the Investor & Treasury Services business line. Following a restructuring exercise, RBC I&TS is targeting a strategy of growth in both domestic and international markets. Harry Samuel, CEO, RBC Investor & Treasury Services, talks about the service provider's strategy and the changes since the bank's buy out of Dexia's 50% of its investor services joint venture.
By Janet Du Chenne(59204)
It has been almost two years since the Royal Bank of Canada (RBC) unveiled its new face for investor services by creating the Investor & Treasury Services business line.

Following a restructuring exercise, RBC I&TS is targeting a strategy of growth in both domestic and international markets.

“From a strategy perspective, our principle objective is to lead in Canada as our home market, but also lead in the offshore jurisdictions of Luxembourg and Ireland where we have a strong presence,” says Harry Samuel, CEO, RBC Investor & Treasury Services. Samuel, an investment banker, is also a member of RBC’s capital markets operating committee.

“In terms of our strategy going forward, given our presence in Asia and our operations in Malaysia, we are well positioned to selectively grow as opportunities unfold in the region. In China, for example, there are major demographic changes underway, where the population now has a very large pool of savings and there are opportunities for us to service those assets through our Asia operations.

The restructuring and rebranding of investor services began following RBC’s acquisition of Dexia’s 50% of its investor services joint venture with the Franco-Belgian bank in March 2012. The exercise has paid off, according to Samuel. “Having a sole parent, an AA rated company, further complements our financial rigor and provides clients with more comfort, compared to the previous ownership structure,” he says. “Having a strong parent helps in terms of operating in Canada where we are focused on growing our client base among institutional investors in our domestic market as well as internationally.”

Commenting on the restructuring, Samuel notes: “We feel that we have made a lot of progress in a relatively short period of time to position ourselves as a specialist provider of custody, asset servicing and payments. And strategically, RBC made the right decision when acquiring the 50% of RBC Dexia that we didn’t own to immediately combine it with certain similar businesses, particularly the bank’s payments and our wholesale funding and liquidity business to create what is now RBC Investor and Treasury Services.

“We went on a fairly rapid integration effort that really has consumed the bulk of the first 12 months as we were ensuring that we had everything as fully integrated as possible,” says Samuel. “This required a very sophisticated and detailed integration plan, which naturally resulted in some restructuring.”

The buy out of 50% of the previous joint venture and the combination of investor services with other businesses of the bank also appear to have paid off. In the first quarter of the year, Investor & Treasury Services’ net income was CA$112 million, up CA$47 million or 72% from a year ago. Excluding the prior year’s restructuring charge of CA$31 million (CA$44 million before tax) noted above, net income was up CA$16 million or 17% driven by continuing benefits from our efficiency management activities and higher net interest income from growth in client deposits. Compared to last quarter, net income was up CA$6 million or 6%, driven by higher net interest income from growth in client deposits and higher custodial fees.

In addition to the combination of RBC I&TS with other businesses of the bank, the service provider also explored corporate alignment. “We’ve been pleased with the process; the integration has happened faster than perhaps expected, and we’ve aligned a number of elements with RBC standards including risk, IT and compliance for instance,” says Samuel. “This also includes branding to ensure there’s consistency in terms of how we brand internally and externally. This is consistent with RBC’s approach overall, and we’re leveraging off RBC’s strong parent brand.”

Engagement with its clients has also changed. “We’ve structured our client relationship model to look at the totality of a client relationship,” says Samuel. “Our client data is organized in such a way that we can look at all of the different interactions that we have with the client, and requests can be run immediately.”

“One debt capital markets client asked if it were possible for them to speak to Investor & Treasury Services on how they can improve their collateral management in relation to their derivatives contracts. Immediately Capital Markets approached us, and their product expert spoke with the team. When the JV was in place that would not have been possible because relations between the coverage teams were not naturally formed.”

RBC I&TS has also invested in managing operational risk. “RBC has a very strong risk management culture, but when you come from an investment banking background, you are very much focused on market, liquidity and credit risk. In the asset servicing business there’s a number of different interpretations of operational risk and one of the challenges for people throughout the industry is articulating how they are managing it.

“In order to further embed best practice in understanding and managing operational risk, we’ve spent a lot of time working with individuals from outside the banking industry, such as in IT and manufacturing [having them] come in and talk to us about their understanding of operational risk.”

As the custody industry grapples with how to create value, given the pressure to invest to keep up with regulatory change, some providers have seen opportunity to assist clients in understanding the risk that their assets and liabilities pose to the financial system. Samuel notes the focus by regulators such as the European Central Bank and the Bank of England on deleveraging: “As banks have deleveraged and become proportionally less of the total assets and liabilities of the total financial system, asset managers or funds that are not considered to be part of the regulated banking sector have grown,” he says. “There’s a focus on measuring the assets and liabilities of the non-regulated banking sector versus the regulated banking sector, so being able to talk intelligently around operational risk is very well received by our clients, such as global asset managers or sovereign wealth funds, who are themselves focused on the issue.

“We put a lot of focus on regulatory projects; everyone is going through the same thing. A lot of people look at it in terms of an increase in the cost of doing business, and so it really then becomes an optimization issue.

“In some instances that means having in-depth discussions about services clients will pay for and operating certain services on our clients’ behalf. These will be done effectively, efficiently and soundly according to our risk standards. There are certain elements they [clients] will have to pay for themselves, and there are other elements that clients will expect that a service provider does for them. It is about striking that balance and an optimization dialogue, which is: how do we ensure that we are ready operationally?

While costs and price remain an issue for custodians, RBC is looking to expand its client base and capitalize on the new structure post the joint venture.

“If I look at our client base now in terms of who they are, as a specialist provider, a theme starts to emerge that these are clients that value our services, financial strength and credit rating, and we can continue to grow and evolve with them to help them to achieve their objectives. On the sovereign wealth fund (SWF) side that’s opened another opportunity for us since the JV structure, because SWFs are obviously very focused on counterparty credit risk, and they would not have really considered business with a 50/50 joint venture that had one financial partner, Dexia, experiencing difficulties.

Going forward, Samuel predicts an industry trend towards an unbundled service model and transparency around pricing. “In terms of the future of custody, historically in the industry, there has been a bundled service model and opacity around pricing,” he says. “Now it’s about fundamentally understanding what is driving costs. We need to reflect this change and continue our focus on client services.”

«