Crisis and competition drive down Russian custody fees

Financial News

Jason Corcoran in Moscow
08 December 2008

Increasing competition from new entrants and sharp falls in equity prices are driving down the margins of Russia’s sub-custody banks.

The recent arrivals of Sweden’s SEB and France’s Société Générale, plus the increasing participation of Russian banks such as VTB and Gazprombank, are forcing fees downward but bringing greater segmentation and opportunities for niche providers.

Natalia Sidorova, head of securities services at ING Wholesale Banking in Moscow, said: “Margins are decreasing, which is inevitable in a busy market like Russia driven by competition. Fees used to be about 20 basis points but have come down significantly in recent years.”

Serhiy Berezhny, head of trust and securities services at Deutsche Bank, agreed but said high fees could still be charged depending on the volume of client assets.

He said: “Different clients are charged differently depending on the level of assets under custody but overall margins have been decreased significantly over the past five years. A big client with $1bn (€800m) could be charged less than five basis points but we would still charge clients 20 basis points if they had assets of $200,000 as they couldn’t be charged at cost.”

With Russia’s main equity markets among the worst performers over the past two months – posting falls of more than 75% – custodians’ incomes generated from assets under custody have tumbled.

ING’s assets under custody fell from $155bn in August to $64bn last month but the Dutch bank’s custody operation remains Russia’s biggest player, serving more than 450 foreign and domestic clients.

Deutsche Bank, a top-three player along with ING and Citigroup, has seen its assets under custody decrease to $30bn from $100bn since the banking crisis in August. Other banks with custody operations in Russia include JSC Bank VTB; UniCredit; RZB and Sberbank.

Sidorova said: “We have seen a significant drop in our overall amount of assets under custody which has led to less safe-keeping fees as indices have gone down. But business is booming from new clients and the volume of transactions is high.”

Berezhny believes market entrants face a tough job to establish a network and contend with the financial crisis.

He said: “The arrival of new entrants this year has been the worst timing with the crisis occurring. It is very difficult to build a network and I don’t think some of them will establish a proper presence till next year.”

Société Générale hopes its capture this year of local bank Rosbank will make it a dominant player in domestic investor services, along with servicing in-bound and outbound assets.

The French bank paid $1.7bn for a 30% share of Rosbank, in addition to the 20% it already owns.
Ramy Bourgi, head of emerging markets development at Société Générale Securities Services, said the French bank would transfer assets to Rosbank once service standards had been met. Matthieu Moreau has been seconded from Société Générale Securities Services in South Africa to help with the transition.

Bourgi said: “We are marrying a strong local player, Rosbank, with a foreign and established player in SocGen.

“There is a good deal of competition and there will be some consolidation but there is also a good deal of segmentation in the market. We are very oriented towards the blue-chip clients in Russia and the international clients entering the country, whereas VTB and Gazprombank are very oriented towards the domestic client base.”

Sweden’s SEB launched custody services in August with a team of five in its St Petersburg office, offering international clients with Russian holdings custody, settlement, safe keeping and asset servicing.

Göran Fors, global head of custody services at SEB, said: “Initially, we are focusing on foreign broker-dealers and not the domestic client base. Russia is very important for our clients because historically the Nordic region has contributed 2% to 3% of overall investment in Russia. Being in Russia bolts it up with our network in the Nordics, the Baltics and Germany.”

Veronika Vasilieva is head of custody for UniCredit Group in Russia, which has a strong network of banks across Europe and is one of the leading sub-custodians in the Russian market through its ownership of International Moscow Bank – acquired by the Italian group’s Bank Austria Creditanstalt subsidiary in January 2007.

It also bought local broker Aton and has a large stake in Russian stock exchange Micex. Vasilieva said the market had fractured into large international providers offering full custodial services and those focusing on niche areas.

She said: “There is a good deal of competition and I expect some consolidation in the industry. The market has developed towards different segments.”

ING and Deutsche Bank are the two biggest custodians for Russian depositary programmes, with JP Morgan and Citigroup also serious participants.

The two market leaders acknowledged the inroads being made by Russia’s big domestic banks such as VTB and Gazprombank as they expand their offerings and diversify.

VTB Bank last month said it had received custodian status for Russian companies under a Bank of New York Mellon global depositary receipt programme while Gazprombank – which like VTB is building an investment banking team – plans to expand its American Depositary Receipt programmes.

However, Gazprombank vice-president and depositary centre head Vladimir Tatsy told news service Interfax that the launch had been delayed by the financial crisis.

Berezhny of Deutsche Bank said: “VTB and Sberbank have definitely managed to break into the realm of depositary receipts and their share of the market will grow but they can’t compete for standard custodial accounts because of their staff’s limited ability in English, a lack of a global relationship management and a lack of a global network.”