Securities Services
Big Issue Debate: Double-digit growth far from certain
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At today's Big Issue Debate at Sibos in Toronto, bankers mused about the impact of market forces and regulation on profits, but as John Gubert discovered, double-digit growth based on increased transaction volumes could well be a thing of the past.Much of the talk at this year's Sibos conference has been about a squeeze on profits rather than growth. Market performance means the securities services industry can no longer live off the endowment benefit of increased transaction volumes and appreciating asset values. Although there has been some M&A activity, this has been relatively modest and so the quick wins from consolidation are not being seen.
John Coverdale, head of transaction banking at HSBC, has HSBC Securities Services within his remit. Tim Keaney is CEO of BNY Mellon Asset Servicing, a predator par excellence. And Paul Simpson, head of global transaction services at Bank of America Merrill Lynch is one of the major securities players. With the support of M. D. Mallya, chairman and managing director of Bank of Baroda, today's Big Debate Session promised to have strong securities content. So what were the big messages for the securities industry?
Firstly, all panellists believe there is still growth in the system. John Coverdale highlighted the fact that Asia is experiencing three times more growth than the OECD. Mallya stressed that intra-emerging market trade and capital flows were growing substantially and that the emerging markets were becoming an ever increasing component of global GDP. So the new world is booming, as a source and destination of capital flows, and all banks are keen to build on or expand their presences in those regions.
Keaney of BNY Mellon saw more opportunity from alternative funds seeking out third party custodians in a post-Madoff age as well as other useful pockets of growth: the DR market as capital raising became more global and the ETF sector. But he admitted these were pockets of growth rather than growth across the board.
There still remain opportunities to reduce industry costs. The emphasis was on automation. It was all about taking paper out of the system. It was all about using technology. Tim Keaney noted IT accounts for 20% of his spend; his challenge is that too much of that is directed to compliance with the ever greater burden of new regulation.
There is regulation that fails to meet any sane cost risk benefit analysis. John Coverdale was concerned at the cost of proliferating class actions, with legal interpretation of much of regulation differing from regulatory intent. Tim Keeney stressed the problems of the AIFMD (Alternative Investment Fund Manager's Directive) in Europe: it wrongly allocated sub-custody risk and it misrepresented the role of a trustee. The former does not select the markets for investment by their clients and the latter are not employed to second guess investor decisions.
But, as Paul Simpson said at the start of the Big Debate, all the changes and challenges of the new environment means many banks are reviewing and re-engineering their business models. And that change creates new opportunities for business. The seniors at this debate agreed that the business environment was tough. U-level playing fields mean companies will look for tax arbitrage, capital arbitrage and regulatory arbitrage as they strive to enhance returns for shareholders. Opportunities exist – emerging market growth, change driven opportunity, industry consolidation, outsourcing – but whether these are enough to put the banking sector on track for the double-digit growth records that many expect is far from certain.