Strong rate risk management to boost banks' securities services revenues in 2024

Global securities services revenues are set for further growth, on top of already record highs, thanks to banks' effective control of interest rate risks.

Combined revenue of the world's 12 largest securities services banks jumped to $41.6 billion in 2023, its highest level since 2016, on the back of rising interest rates, Coalition Greenwich research found. Revenue in the first half of 2024 kept up the momentum, increasing 3% on the prior-year period to $21.3 billion, the company's latest data shows.

Securities services include areas such as custody services, fund accounting and administration, broker-dealer clearing and settlement, and corporate trust and depository receipt services.

While central banks have started to cut rates, securities services revenues at the top sector providers are expected to grow further in the second half of 2024 as lenders have been quick to build up defenses against the risk of falling rates, Eric Li, head of global banking research at Coalition Greenwich, told S&P Global Market Intelligence.

"Across the Street, every bank has been managing their rate exposure so well that the decline coming from rate cuts will be very well contained compared to our initial forecast," Li said in an interview.

Hedging programs have considerably reduced banks' sensitivity to rate changes, meaning net interest income (NII) is now seen falling by significantly less than originally projected, Li said.

"As a result of that, we are looking at a very constructive second half of securities services revenues, which are still going to grow," he said. Further supportive factors for revenue growth are the good transaction volumes and continued strength of equity capital markets, Li said.

The positive effect of hedging will likely give a boost to sector revenues in 2025 too, even though more rate cuts are expected for that year, according to Li.

Coalition Greenwich — a division of CRISIL, an S&P Global company — tracks securities services revenues at Brown Brothers Harriman & Co., BNP Paribas SA, Bank of New York Mellon Corp., CACEIS Bank SA, Citigroup Inc., Deutsche Bank AG, HSBC Holdings PLC, JPMorgan Chase & Co., Northern Trust Corp., Royal Bank of Canada, Société Générale SA and State Street Corp.

The banks booked revenue growth across securities services products in the first half of 2024. Fund services achieved the strongest increase at 5% year over year, thanks to rising transactional volumes, higher investor demand for exchange-traded funds and continued growth in alternative fund services, Coalition Greenwich's sector report shows.

Custody services revenues, which increased the most amid the rate hikes in the previous two years, grew at a slower rate in the first six months of 2024, mainly due to weaker NII growth owing to deposit mix changes, the report shows.

Regionally, growth in the first half of 2024 was strongest in Europe, the Middle East and Africa, where revenues increased 7% year over year, followed by a 3% increase in Asia-Pacific, while revenues in the Americas remained largely flat year over year. A rise in fees on the back of better transactional activity in the Americas was counterbalanced by a decline in NII resulting from deposit mix shifts, according to the report.

Clients seeking to benefit from higher interest rates has shifted banks' deposit mix toward costlier products, slowing growth in NII, which is the difference between what banks earn on loans and what they pay on deposits.