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Amid plunging margins, securities services industry faces further consolidation

Despite strong equity market performance, global securities services banks are facing plunging margins and stagnant revenues, new data shows, increasing the likelihood of further consolidation in the industry.

State Street Corp.'s $3.5 billion acquisition of Brown Brothers Harriman & Co. investor services unit on Sept. 7 will be followed by many more deals in the securities services space, with smaller players being the "prime target" by the largest banks, according to Eric Li, director at Coalition Greenwich, a research company.

"While the industry has no organic growth, people are looking for M&A," Li said in an interview. "The top 10 banks are probably going to clean up the street in five years' time."

Coalition Greenwich's latest research found that revenues at the 12 largest global securities services banks remained flat year over year, even though equity markets reached an all-time high in the first half of 2021.

The research company's securities services index tracks The Bank of New York Mellon Corp., Citigroup Inc., JPMorgan Chase & Co., Northern Trust Corp., Royal Bank of Canada, HSBC Holdings PLC, BNP Paribas SA, Société Générale SA, CACEIS Bank SA, Deutsche Bank AG, State Street and Brown Brothers Harriman.

Total revenues for securities services, which include products such as custody and fund services, for those banks landed at $18.1 billion in the first half of 2021, from $18.0 billion a year earlier.

"The equity market is hitting a historical high," said Li. "Technically, these bank custodians are supposed to make more money. In reality, they're not. The revenue is stagnant."

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Custody revenues were down 2%, while other services — a category that includes corporate trust, depository receipt, agency securities lending, broker/dealer clearing and settlement, and collateral management services — dropped 4%.

Fund services were the only business line in which revenues grew, by 7% year over year, driven by higher assets under administration among the banks, according to the research.

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Coalition Greenwich's index for revenue productivity, which reflects developments in industry margins, reached its lowest point since the company started tracking this measure in 2016, and Li expects it to decline even further in the second half of 2021.

The margin decline is driven by fee compression and fund fee waivers due to competitive pressure, while low interest rates are causing net interest income to decline.

The Americas were the hardest-hit region, with total revenues in the first half of 2021 down 2% year over year. In Europe, the Middle East and Africa — EMEA — revenues were up by 3% as industry asset growth outpaced fee compression, Coalition Greenwich said.

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Coalition Greenwich is owned by CRISIL. CRISIL and S&P Global Market Intelligence are owned by S&P Global Inc.