5 June 2020
- BBVA and Bankinter are the only major banks that have not yet joined the trend of separating the management business from the depositary business. Clara Alba.
The figure of securities depositary is perhaps the least visible part of the investment world. However, its importance is undoubtedly crucial for protecting shareholders from conflicts of interest, malpractice by managers and even potential losses.
Until recently, most institutions maintained the management business and the depositary business under the same umbrella. In addition to safeguarding the assets, the depositary also has the duty, inter alia, to supervise the manager and, if necessary, to report any type of anomaly to the supervisor. Therefore, the regulations recommend this 'divorce' towards an independent custody service.
This process has accelerated during this last year, also in part due to the pressing need of banks to obtain capital gains from the sale of businesses that are no longer core to them.
The last wave
The latest institution to undertake such a move has been Bankia, with the transfer to Cecabank of its activity as an institutional depositary of investment funds, SICAVs and pension funds, which amount to a total volume of over €26,000 million. This transaction, which will be completed during the current financial year, may see the addition of further charges throughout the duration of the contract depending on whether certain objectives are fulfilled.
At the beginning of the year, Kutxabank also sold its fund depositary business to Cecabank, and Banco Sabadell did the same with BNP Paribas. Meanwhile, last year Banco Santander also created a joint venture with Crédit Agricole in which the Cantabrian bank maintains a 30% stake, with the French company having the highest share in the business.
Among the market's major institutions, only BBVA and Bankinter have remained on the sidelines of a trend that is not only specific to Spain, but to Europe as a whole.
One only has to look at jurisdictions such as Luxembourg, where the separation between the different 'points' of the investment chain has been absolute for many years now. Therefore, it will be difficult for both BBVA and Bankinter not to also end up outsourcing their depositary businesses in the medium term.
A welcome divorce
Javier Planelles, Cecabank's Corporate Director of Operational Services, recalls that 'the main driver for this separation between management and custody stems from the recommendations included in the regulations', but, thereafter, 'the banks have also done their own thinking on whether it is worthwhile for them to engage in this activity, which involves a strict liability to reimburse losses, and also a greater responsibility for control'.
On this first point, an example to demonstrate the importance of the independence of the depositary. In 2015, following the scandal that led to the intervention of Banco Madrid and its Andorran parent company, BPA, the assets of its customers' investment funds were completely frozen.
One of the reasons why these savings could not be withdrawn from the bank for a long time was precisely because the bank was at the same time the manager and depositary of these assets.
In fact, Banco Madrid also managed some Liberbank and BMN funds, which were indeed able to continue with their subscription and reimbursement transactions because their depositary was another bank, in this case Cecabank.
The regulations have also pushed depositories to be much more specialised and to exercise the role of supervisor, with a focus on good practices that require that they be organised as a legal entity that is different to the managing entity. And, although the regulations do not specifically prohibit this 'union', it does establish additional requirements for the management of potential conflicts of interest.
For example, there can be no overlapping of directors between banks and their managing entities. Thus, conflicts are avoided in key areas such as the allocation of resources or the control of the activity in the investment chain.
Responsibility and specialisation
According to Javier Planelles, this greater responsibility and specialisation to which the depositaries have had to 'adapt' requires, in turn, more investment by institutions which, in many cases, no longer see this business as core, especially those with a more retail profile.
'When deciding whether to separate management and custody, institutions must consider whether they have the sufficient experience and capacity to maintain this specialised service. Moreover, whether they are prepared to undertake the investments they require and assess whether the income received from this business compensates this effort', says Planelles. In this regard, he recalls that income from depositary fees is barely 10% of management fees.
Thus, in addition to working towards protecting the shareholder, with greater independence throughout the investment process, the sale of the depositary business may also help banks generate capital gains, at a time when they undoubtedly need to scrape together whatever they can to continue protecting their balance sheets from the impact of the crisis.
For example, analysts at Renta 4 Banco remind us that the €170 million that Bankia will receive for transferring its depositary to Cecabank are equivalent to 15 basic capital points, fully loaded, not counting the additional charges if the objectives are met. They added that, 'given the current situation, the bank may take advantage of these capital gains to allocate greater provisions to cover the expected increase in arrears more comfortably, although no decision has yet been taken'.
