State Street last week announced the completion of its purchase of Deutsche Bank's securities services, marking a consolidation of global custody providers - a theme which some market players expect to gain momentum throughout 2003.

The $1.5 billion sale sees State Street take over a substantial part of Deutsche Bank's business representing approximately $2.2 trillion in assets (as at August 2002). The sale affects mostly the European and US operations where Deutsche Bank had a large global custody presence as well as services in fund administration, securities lending, performance measurement, and benefit payments. One of the core clients being transferred, representing about 25% of the acquired revenues of the business, is Deutsche Asset Management which has signed a 10-year service agreement with State Street. The deal also included Deutsche's US and UK domestic custody and securities clearing services.

Oddly, the German bank decided to hang on to its Asian sub-custody operation. Local client reaction to this decision is still to be gauged. The customers that FinanceAsia spoke to about the matter late last year said they were waiting on final news that the deal with State Street was going ahead before reviewing their relationship. "Whether we continue to hold our account with Deutsche Bank will depend on how serious they are about staying in Asia," said the head of a US based custodian bank.

He said his fear was that the decision to hold on to the Asian sub-custody piece didn't gel with Deutsche Bank's overall reason for exiting the global business. If Deutsche wants to get out of custody because it considers it a non-core, low profit business then the poorly paid technology-intensive job of clearing local trades certainly doesn't fit the bill, he said.

On the global custody front, State Street is now meeting with former Deutsche Bank clients to discuss their needs, particularly from a technology perspective. The integration of the bank's two back office systems will take some time. So will the integration of 3,200 Deutsche staff. State Street has made it clear that it plans to cut costs in the acquired business by between $125 million and $150 million in 2003.

Speculation that there will be further consolidation in the number of global custody providers stems from persistent pressure on profitability as equity markets enter their third slow year. Full service banks will be asking whether custody remains a strategic service or whether they should get out of the game and focus on core competencies.

Speaking to FinanceAsia last year around the time that the Deutsche Bank sale was announced, a custodian working for a rival firm said: "It just goes to show that size doesn't matter. Deutsche Bank is a fifth largest player in the world, but when its directors decide that the business is not profitable they can move quickly to get out regardless of how many good clients they have."