Home / Analysis / Behind the NAB Custody sale: this time it’s serious

(Pictured: Christine Bartlett)

by Greg Bright

National Australia Bank’s asset servicing business has a long and illustrious history. It’s still the biggest in the market and the last Australian-owned business of its kind. It’s been on both the acquisitive side and the seller side of the market before, with at least three lengthy negotiations for deals in the past eight years, but last week the business was formally announced to the ASX as ‘for sale’.

First there was “Project Mexico”, at around 2006, when the NAB spent several months trying to come to terms with Sydney-based JP Morgan (Mexico: south of the border) to purchase JP’s Australian custody business. The rumoured numbers were big. The only hiccough in the deal was the undisclosed liability on JP’s side. This liability had come about through the CSS/PSS (now Commonwealth Super Corporation). JPMorgan would not disclose what the liability was so NAB could not sign the deal.. The man who had successfully orchestrated NAB’s purchase of CBA’s custody business to NAB, Ian Scholes, still laments that the deal did not go through.

NAB is thought to make a gross profit of about $150 million a year out of its custody business. The numbers are necessarily rubbery because custody can sometimes be a legitimate loss leader. Whether or not cash and FX trades are booked to the bank or to asset servicing would impact significantly on the earnings. And the history of NAB Custody, in a sense, is also the history of securities servicing around the world. Is it possible, for instance, for a domestic bank, no matter how big, to keep pace with the global custodian banks in securities servicing?

The rumour that NAB asset servicing was on the market again started to swirl around the industry about a month ago. By early last week, there was word that “an announcement” was imminent. As it turned out, though, the announcement to the ASX last Tuesday was that NAB would be considering offers for a new “partnership” for its custody business. It seems that none of the prime candidates have had meaningful new discussions with NAB for at least a year or so.

Here’s the history:

NAB’s formerly sleepy domestic custody business came alive in the early 1990s when master custody swept through the superannuation industry as a must-have service. Master custody, which includes all administration, unit pricing, tax and reporting, was introduced to Australia by State Street in 1986. That was a big year. It was the year compulsory 3 per cent Award Super was negotiated by the Hawke-Keating Government with the unions and also the year Russell Investments opened an office and introduced asset consulting with sector-specialist funds management. It probably marked the birth of the modern era of superannuation in Australia.

JP Morgan gained traction shortly after and NAB led the Australian contingent to pick up this new business. The other Australian custodians at the time included Westpac, Commonwealth, AMP (which became Cogent and has formed the basis of BNP Paribas’ business in Australia), Perpetual (which similarly formed the basis of RBC’s business) and ANZ.

NAB’s first large break came in mid 1997. Patrick Liddy, the former head of strategy, sales and marketing, recalls: “In August, during one of those cold winter forenoons, the ones that make wearing a suit jacket mandatory, there were four of us approaching the city side of the Yarra from Southgate. One of them turned and said: ‘Fancy a beer Don?’ Now the owner of that comment, Mike Pratt, was never one for drinking and especially not before noon. But we had reason to celebrate. It was Don Argus, Mike Pratt, John Treloar and myself and we had come from VFMC convinced we’d won the business from State Street.”

NAB had gone from being liked to the most aggressive of the custodian banks in this market. NAB went from about number four to number one by the late 1990s. The next major win for NAB was QIC’s global custody. QIC at the time was the darling of investment managers. The win went against the grain as it was a global mandate only. So one of the ‘globals’ was expected to win.

The former executives of that era, such as Treloar, Pratt, Tony O’Grady and Liddy, have always denied that they undercut the market to buy their market share, but their competitors would usually disagree.

Anyway, by the early 2000s the other banks and local institutions had given up on this low-margin business, leaving NAB to fly the sole Australian flag. It had bolstered its position with a long-term alliance with BNY Mellon and presented a full domestic, master and global offering to the market.

After the negotiations with JP Morgan fell through, NAB went through some senior management changes and a new head of custody, Leigh Watson, started to entertain the idea of a new joint-venture business with BNY Mellon. Inexplicably to many in the industry, NAB failed to win the custody contract for the Future Fund in 2007, which allowed an open door to the new custodian on the block, Northern Trust, to enter the local market.

In about 2009-2010 NAB commenced extensive talks with BNY Mellon for a complex new arrangement which would involve BNY putting up a significant sum and having a better amalgamated Australian operation. The talks dragged on and, once again, BNY eventually baulked at the price. Watson, who had been eyeing an Asian role for himself in the new venture, left the business not long after.

State Street, which had re-entered custody for super funds after earlier selling this part of its business to Commonwealth in a deal which ended in tears for both parties – NAB purchased the bulk of those clients for a rumoured $7 million – wanted to make up for lost time and allegedly offered NAB $1 billion for its custody operation. NAB, once again, held out for more.

By 2010, NAB clients started to get jittery and two of its biggest, QSuper and Sunsuper, went to tender and appointed State Street as their new provider. To make matters worse, QIC, which was NAB’s biggest client outside the group (MLC is the biggest), appointed Northern Trust for a new middle-office mandate, instead of extending the backoffice role of NAB.

Opinions differ on what happened next. Some say State Street had another tilt at NAB after the QIC, QSuper and Sunsuper losses, but in any case, no deal emerged.

Christine Bartlett, an experienced executive with a strong IT background, was brought in to steady the ship in late 2012. She had a win in the non-super space, notably a big insurance custody mandate for Suncorp, and a smaller sub-custody mandate for Deutsche Bank but with each new tender, NAB found itself having to sharpen its pencil ever more. It lost Cbus last year, despite that fund’s close long-term relationship with the bank, and had to cut back on its staffing.

This caused another stir. When Stephen Moloney, a long-standing relationship manager based in Sydney was let go, four of his clients objected strenuously. They wanted him reinstated, otherwise they would go to tender as a group. Bartlett fronted a meeting with them and held her ground. She felt she couldn’t back down and didn’t. So far, the group – consisting of Ausbil, AMIST, ClubPlus and Nationwide – has not yet announced its intentions.

With much of the regulatory change having been undertaken, a lot of super funds have turned their attention to their custody contracts in the past year and NAB has had to defend against an avalanche of competition from State Street, JP Morgan, Northern Trust, BNP Paribas and the newcomer, Citi, which last year won HostPlus, a prestigious client.

Recently, NAB has pitched to retain CARE Super – which is currently at fee negotiation stage – but coming up later this year it will also have to defend GESB, being advised by Thomas Murray, and VFMC, which has yet to issue tender documents. The announcement to the ASX regarding the sale is likely to have a negative impact on any re-signing or new business.

Perhaps the only consolation to NAB is that JP Morgan has also been having a rough time, losing three tenders on the trot to Northern in the past year and rumoured to be about to lose a fourth (Australia Post).

So, who are the likely buyers? State Street is considered the frontrunner, but JP Morgan and Citi would also have good reason to deal. JP Morgan is the only custodian operating in Australia which historically handled all three sectors – domestic, master and global – itself. Citi and HSBC also do domestic, and Citi now has its first master custody contract with an industry fund. BNY and State Street, the two biggest custodians in the world, don’t do domestic anywhere outside the US and UK. BNP Paribas probably doesn’t have much to gain from taking over a domestic book. Northern and BNP both pride themselves on their global or regional platforms and probably would have fewer synergies than the others to benefit from.

NAB has a total of 170 clients, including the foreign institutions for which it does domestic custody and a lot of small clients including insurance companies, universities and charities. It has 37 big super fund and fund manager clients. According to the latest ACSA figures, for December, 2013, it administers $631 billion of the $2.3 trillion in total Australian and non-Australian assets. The next biggest is JP Morgan with $419 billion, followed by BNP Paribas with $305 billion.

NAB has appointed an international advisor to assist with the sale process and is hopeful of reaching at least a heads of agreement by October this year. Liddy, who has his own consulting firm, MSI Group, believes this will give the existing clients time to reassess their custody arrangements and they are likely to move against both NAB and any buyer because there will have to be a ‘physical’ transition from one custodian to the new one. “Consultants in the industry are no doubt gleefully rubbing their hands together,” he says.

NAB has often emphasised the advantages of being Australian owned. Two of its competitive strengths are considered its tax and accounting capabilities. It also last year strengthened the BNY Mellon alliance around “insights” and “technology”, offering the BNY Eagle platform to clients and various new middle-office products.

But for clients, there has always been a doubt about whether NAB could keep up with its bigger global competitors on the technology side over the long term and exactly how committed the bank was to this part of the industry.

NAB uses the ever-popular DST-owned Hi-Portfolio system and has its own bespoke retail unit registry. Hi-Port, however, may become a hindrance to a sale because it is an expensive contract which may have to be bought out if a new buyer wants to transition NAB clients to a different system.

Most custody contracts are open to renegotiation in the event of a change of beneficial ownership, so any ownership transition for NAB would likely be a drawn-out affair.