Global custody: global trends

Business is booming in the back office. While the glamorous side of the financial services sector is feeling the pinch in the wake of the latest credit crunch, the only way is up for the profits of the big players in the custody space.

The world's largest global custodian, BNY Mellon, posted a 67% increase in pre-tax income within its asset servicing sector in Q2 2008 versus the same period in 2007.

Another big player, JPMorgan Worldwide Securities Services, saw a 21% increase in net profits in the first half of 2008 compared to the same period last year, Citi Global Transaction Services profits grew by 30%, and State Street experienced a 39% rise in revenues.

So, how it is possible for securities services firms to prosper while fund managers and investment banks suffer in the current turbulent market conditions?

Quite simply, through diversification. Global custodians have expanded their client base to include hedge funds and private equity firms, as well as their traditional mutual fund business.

What's more, fund managers are moving into increasingly complex asset classes that were usually the domain of hedge funds, and global custodians have developed the sophistication to service these trades.

At the same time, the custody industry is consolidating: larger firms are swallowing up smaller, but by no means tiny, rivals to gain a greater share of the market.

The final factor putting a smile on the face of global custodians is the fact that new locations for business are opening up. Citigroup recently upped its presence in Ukraine, for example, and JPMorgan recently acquired Nordea's custody arm to break into the notoriously difficult Nordic region.

Custodian offices have also been popping up in the Middle East, as the major players seek to position themselves close to the wall of money coming out of the region. The fund management industry is set to triple to $200bn over the next five years, according to Franklin Templeton.

But even aside from these developments, Francis Jackson, head of business development, EMEA at JPMorgan Investor Services, says the custody sector is largely sheltered from market fluctuations anyway.

"Our business goes up in line with the market, but doesn't fall with the market," he explains.

Click here for an explanation of the global custody sector.