NAB Asset Servicing (NAS) is set to replace BNY Mellon with Citi as its global custodian, ending an association spanning about 20 years. The decision follows a review undertaken this year and may well involve closer involvement between the two in other aspects of their custody businesses.
Matt Brown, NAS chief executive, launched his strategy internally late last month, with a key plank being an upgrade of capabilities across the service offering. Brown, who worked in various senior securities servicing roles internationally with Citi prior to joining NAS last year, and before that with State Street in New Zealand and Australia, confirmed the review last week but said no final decision had been made. His opposite number at Citi, Martin Carpenter, likewise said he was unable to comment following a report on talks between the two companies in the Australian Financial Review on August 5.
It is understood that at the internal NAS strategy launch it was emphasized that clients should have a portfolio of the best possible products going forward. NAS did not need to own all the technology or the infrastructure to do that.
NAB was able to get a good look at some of the global custodians last year when it embarked on what it called ‘Project Soda’. This was a review by the parent bank with a view to either selling the whole or part of NAS. It decided to do neither but the uncertainty it caused in the marketplace made some clients nervous and NAS subsequently has lost several large clients, most recently the $50 billion VFMC.
Cementing a new global partner – especially one which has demonstrated a willingness to expand in asset servicing in Australia – is likely to assuage these concerns. It may, in fact, give both NAS and Citi a big fillip in the Australian marketplace, representing a brand new offering based on established capabilities and experience.
NAS is still the largest custodian in Australia by a wide margin. It looks after (safe keeping and accounting and reporting for) about one-third of all of Australians’ superannuation assets. It is also the only remaining Australian-owned custodian.
Citi, which for years focused on domestic – known as ‘sub’ – custody in Australia, ramped up its small master custody business in 2013 with a successful bid for the full service of HostPlus. This was Citi’s first industry super fund client and a headline-grabbing win away from JP Morgan, which is the second-largest custodian in Australia. Prior to that Citi’s only super fund client was the Commonwealth Bank’s staff officers’ fund. Citi does all of Colonial’s and Commonwealth Bank’s sub-custody. It also won the Australian business of Dimensional Fund Advisors.
Rumours about a new deal have been swirling around the industry for several weeks. The rumours are a little more complicated, though, than just a swap of BNY Mellon for Citi on global, which should be a fairly clean and easy transaction.
It has been rumoured that Citi may pass over to NAS some of its master custody business, including Host and, perhaps, Dimensional’s Australian business. The Citi/Dimensional arrangement, however, is a global one. It has even been suggested that the Commonwealth Bank’s staff super fund may be novated for master custody to NAS, as unlikely as that may seem.
Rumours around sub-custody are more complicated still. Because asset servicing is a low-margin, scale-oriented business, add-on services such as cash and foreign exchange management are important to the provider’s bottom line. Therefore, when scale has been achieved, as both Citi and NAS have in their sub-custody businesses, they are unlikely to want to give up much of that. An interesting example is State Street, the world’s second-largest custodian after BNY Mellon. State Street outsources sub-custody in all markets except North America and the UK. In Australia it uses HSBC, which is the biggest sub-custodian locally.
* Greg Bright is publisher of Investor Strategy News (Australia)