U.S. Custody Banks: Citadels of the Global Financial Markets

This commentary reviews the custody banking industry landscape and provides a business model overview of the U.S. "pure play" custodians.

Key highlights include:
-- Custody banks operate within a niche area of the financial sector. With trillions in AUC/A, the three largest U.S. "pure play" custody banks act as conduits to the global markets by helping their large institutional clients execute financial transactions across different jurisdictions.
-- These custodians have maintained their entrenched strong market positions given their ability to continuously adapt to the global financial markets. Their vast global infrastructures have also allowed them to benefit from significant economies of scale.
-- Nonetheless, the industry remains highly competitive, and the "core" custody product has experienced noticeable price compression over the past decade. To mitigate these effects, the custodians have expanded into higher margin geographies/ higher priced custody assets, as well as diversified into other fee generating businesses.

"Compared to traditional banks, the "pure play" custodians operate business models that have lower credit risk given their balance sheet compositions, as well as higher levels of recurring fee revenues. While we acknowledge the impact of the industry's "core" price compression, the notable strength across other aspects of our credit ratings build-up supersedes this, resulting in the custodian's superior credit ratings," said Eric Chan, Vice President - NA Financial Institution Ratings