Securities services banks' revenue performance could benefit from the current industry turmoil as depositors move their cash into low-risk money market funds.
The collapses of SVB Financial Group and Signature Bank as well as the rescue deal for Credit Suisse Group AG have spurred concerns about the safety of bank deposits. This has sparked a "significant inflow into market money funds" and is driving up assets under administration and custody at securities services banks, said Eric Li, research director at Coalition Greenwich, a division of CRISIL, an S&P Global-owned company.
"This is clearly going to benefit the securities services industry," Li said in an interview.
The world's 12 largest securities services banks recorded a combined revenue of $38.6 billion from custody, fund and other securities services in 2022, according to new Coalition Greenwich data. This is up 6% from 2021 and at the highest level since the global financial crisis.
The research company tracks securities services revenues at US-based The Bank of New York Mellon Corp., Citigroup Inc., JPMorgan Chase & Co., Northern Trust Corp., State Street Corp. and Brown Brothers Harriman & Co.; Royal Bank of Canada; France's BNP Paribas SA, CACEIS Bank SA and Société Générale SA; Germany's Deutsche Bank AG; and UK-based HSBC Holdings PLC.
Net interest income boost
Custody revenues rose 11% year over year in 2022 as central bank interest rate hikes bolstered banks' net interest income. Revenues from other services — corporate trust, depository receipt, agency securities lending, broker/dealer clearing, and settlement and collateral management services — were up 9% year over year.
Fund services revenues, however, dropped 6%, driven by lower fee income. Fee compression due to competitive pressure has affected margins in the industry for several years and will make it challenging for banks to secure revenue growth once net interest income normalizes, Li said.
"You can see from the product dynamics that the [securities services] industry is not doing that great," he said. "The key driver for the industry will be fee revenue performance, which is dependent on the stock indices, but most importantly, whether banks are able to reprice their products."
Money market funds
After three years of growth, global securities services banks experienced declines in assets under custody and administration in 2022. Growth could return in 2023, Li said, as depositors seek the relative safety of low-risk money market funds.
About $286 billion flooded into money market funds between March 1 and March 23, the Financial Times reported, citing data provider EPFR.
Securities services revenue growth was highest in the Americas and Asia-Pacific in 2022. Lower revenue growth in Europe, the Middle East and Africa was partially driven by weak local currencies and Russia-related write-downs, Li said.
Coalition Greenwich expects net interest income growth among securities services banks to slow in 2023 and overall revenues to remain flat from 2022 levels.