To be honest, the NAB Asset Servicing/Citi deal probably means more to those organisations, at least in the short term, than it does to their customers. But longer term, there are a range of new possibilities. Matt Brown of NAS and Martin Carpenter of Citi talk – just a little – about the deal.
The new arrangement between NAS and Citi, which involves Citi replacing BNY Mellon as global custodian for NAS’s super fund and fund manager clients – encompassing an estimated $60 billion – was first mentioned as a rumour in the Australian Financial Review in August. Investor Strategy News reported on the arrangement in greater detail a week later. Meantime, the market has been gradually informed ahead of the formal announcement last week. After speaking with NAS boss Matt Brown and Citi securities services boss Martin Carpenter, this is my view.
Citi has spent a lot of time, money and effort on building a master custody offering in Australia but still has only three main clients – the Commonwealth Bank’s big staff fund, the Dimensional Fund Advisers local and global business and the recently won HostPlus, in 2013. Host was the game changer for Citi, representing the first industry fund win. And it was a long and hard-fought tender process against incumbent JP Morgan and the other majors.
To my mind, it’s the apparent commitment to the market by Citi which offers the greatest potential benefits for the NAS clients under the new arrangement. The 20-year arrangement with BNY Mellon had long been tiring. BNY Mellon suffered several management and client-loss setbacks in Asia from late in 2013 – Australian custody was controlled from Singapore, which was also annoying – and was providing less and less client service and marketing support for the joint venture. Brian Slade, the long-time BNY Mellon head of custodial relationships in Australia and the first chair of the Australian Custodial Services Association about 20 years ago, for instance, was made redundant.
And BNY Mellon had two chances in the past few years to purchase NAS from the bank – most recently last year -electing to opt out at the final stages of both processes. State Street, in fact, is rumoured to come up with the best offer but this was rebuffed by the NAB bank board.
Citi “sold” HostPlus’s CIO, Sam Sicilia, and CEO, David Elia, on their new technology for master custody and the global Citi platform. For Elia, so the story goes, it was the technology which was important, especially into the future. For Sicilia, it was the relationship which has enabled him to leverage a new information flow from Citi’s global customers. For example, they now have a regular phone hook-up between big pension fund clients around the world which Host’s investment staff join in and benefit from.
For Commonwealth, Dimensional and Host, the fact that Citi is replacing BNY Mellon at NAS doesn’t matter in the short term. Nor does it matter, much, to the rest of the NAS client base. I think they will get better service under Citi than they did with BNY Mellon, but most probably won’t notice it.
It’s the longer term where the story gets interesting. For starters, BNY Mellon is likely to pull its $70 billion in domestic custody which is currently serviced by NAB and go to another supplier. HSBC, the largest domestic custodian, is the obvious first port of call but others such as BNP Paribas and JP Morgan are also candidates, at least in theory.
Matt Brown says he has not been advised what BNY Mellon is likely to do with this mandate. Meantime, they will be involved in an orderly transition of the assets over the next six-nine months.
“They will probably do what we did,” he says. “That is, a strategic review of their options and due diligence on the other players… I don’t see them doing it [domestic custody] from Singapore.”
Carpenter says that there will be a number of new hires at Citi to support the NAS business. “We’re really excited to be working with the largest administrator in Australia,” he says. “We will be supporting NAS in their new business endeavours but, of course, that doesn’t stop us from pursuing our own new business opportunities.”
This is where it may get a little messy. Both Citi and NAS offer master custody to big super funds and Australian-domiciled fund managers. Brown and Carpenter, though, believe this will not be a problem.
“There are certain RFPs that NAS wouldn’t get involved in,” Brown says. “In those instances we will think about how we can support Citi, and vice versa.”
Carpenter says that, to a large degree, it is about what the client, or potential client, wants.
At the end of the day, Citi is partnering with a company with a big local balance sheet and more than 600 people on the ground. Let’s hope they make a better fist of it than BNY Mellon did.
* Greg Bright is publisher of Investor Strategy News (Australia)