State Street is poised to become the largest U.S. custody bank following the completion of a deal that may have offered the last chance for a major acquisition in the business.
A race for scale is driving a flurry of consolidation within the wider banking industry. But the need is even more pronounced in custody banking — a typically sleepy, paperwork-intensive business where funds and securities are managed for safekeeping, and other administrative services, like debt and interest payments, are offered to clients.
Boston-based State Street agreed this month to pay a hefty $3.5 billion for Brown Brothers Harriman Investor Services. The price tag, which is equal to a premium of roughly 12 times the seller’s estimated 2021 earnings, suggests a bidding war between State Street and some of its rivals.
Last year, Chicago-based Northern Trust and BNP Paribas’s asset servicing division reportedly engaged in talks about buying BBH, according to
After coming away with the prize, State Street executives said there may be few chances in the industry for a similar jump in size any time soon.
“This may be the last independent consolidation opportunity of scale in the global asset servicing landscape,” State Street Chief Financial Officer Eric Aboaf said during a virtual conference hosted by Barclays Capital on Sept. 13, six days after the Brown Brothers Harriman deal was announced.
The $5.4 trillion in assets under custody at BBH would vault State Street into the industry’s top position once the deal is completed by the end of the year, according to a recent presentation to investors. With roughly $37.3 trillion in assets under custody, State Street would move ahead of Bank of New York Mellon and JPMorgan Chase.
“To be a top player in the custody space it is really about having scale and the best tech to track and retain your clients,” said Michael Brown, an analyst at Keefe, Bruyette & Woods.
Executives at rivals BNY Mellon and Northern Trust were asked during the Barclays conference if the move would spark more urgent competition within custody banking.
Jason Tyler, chief financial officer at Northern Trust, declined to comment on the company’s reported bid for BBH. But he expressed interest, depending on the cost, in finding another deal.
“If an opportunity comes up at a fair price, we’re all in,” he said.
On Tuesday, Northern Trust announced a smaller deal, which will give it an equity stake in Essentia Analytics. The latter company is attempting to use behavioral science to identify biases that impact investment performance.
During remarks at the Barclays conference, BNY Mellon CEO Todd Gibbons hinted that the New York company would be less interested in a potential deal.
“We are focused on organic growth,” Gibbons said. “That doesn’t mean we won’t take into consideration any inorganic growth opportunities if they present themselves. The bar is very high.”
State Street touted the BBH deal not just for the custodial assets it is acquiring, but also because the sale includes a tech gem.
Lou Maiuri, State Street’s chief operating officer, said during the Barclays conference that a “best-in-class fintech asset” allowed BBH to build new services based on the flow of trade data it has collected. State Street is planning to attach this technology to a data service, known as Alpha, that it launched last year, according to Maiuri.
Before the deal, State Street had been quietly trying to build a software package that would outdo the offering from BBH, State Street officials
The jockeying for size in the custody banking business may turn into more of a tech race, as potential smaller deals far outnumber the possibility of acquiring trillions of dollars in custodial assets, Brown said.
“There really is a scarcity of obvious candidates,” he noted.
