The long demise of NAS

The news last week that NAB has decided to shutter their asset servicing business (National Asset Servicing aka NAS) is not a surprise to most of us in the sector. It’s been coming for years in some shape or form.

I share here some reflections on this event as someone who has been in this market in one way or another since the late 1990s.

Asset servicing is about hiding complexity

In summary, an asset servicer manages complexity for their clients. Whilst we talk about asset safekeeping as a foundational service, the reality is that everything a custodian does is about protecting the financial security of their client’s funds. From getting the unit price right, the tax correct and the APRA reporting right, the whole service is trusted and relied upon and must be right.

Their role is to insulate their clients from the difficulty of processing all the multi-faceted trade, cash, corporate action (and other asset level activity) and consolidating it into a position/holding which is then used in all the various reporting services. Make no mistake, doing this is hard.

Custodians must make ongoing significant investments into core systems platforms to run these services and to develop the people that clients then rely on to operate the platforms accurately and completely on a daily basis. The core service delivery is guided by the processes and controls that the custodian develops and that a client relies on.

When you add all this up and play it across the whole range of asset types, markets and forms of reporting, the overall picture is massively complex, and it take constant attention and diligence to get it right and keep it right. It is a credit to the overall sector that it works as well as it does!

Being great at asset servicing is about getting two big things right: assured service delivery and also being a great strategic partner.

All the above is about the core service. Sometimes custodians are referred to as the “plumbing” of financial services – and there is some truth in this. However, as if all the above wasn’t hard enough, being a great custodian is about much more than just the plumbing. You also have to be a great strategic partner for your clients.

I have often said that the reality is that housing developers don’t call Sydney Water and ask for what their new ideas are in waste water piping. But the clients of an asset servicer are always changing and developing and require their custodian to adapt with them.

This particularly means that a great asset servicer must have a full service offering that is able to extend with the needs of the client. There will always be one client who thinks you are behind where you should be. But if you do the work with that client on the capability that they want, then you can use it with your other clients (who will think you’re a genius!).

And this requires ongoing commitment to a reliable investment into your platform.

And it all needs to be delivered at a competitive price

The reality is that the Australian market for asset servicing has always been competitive and (at times) this has led to some very aggressive pricing. It is interesting how often you hear of providers repricing clients after the first contract period because they have undercut themselves too far to win business...

Anyway, the point is that there is no price premium for being ‘better than the market’ at anything. Everyone is held to the same standard and must perform with excellence at a competitive cost point.

So why does anyone do this? Banks love owning asset servicing divisions

This is a really tough business, so it is a fair question. Banks own asset servicing divisions for three reasons:

1)     Access to cheap balance sheet

This is the most important by far. The aggregate of the cash balances left by clients and their fund managers can be anywhere between 0.5% and 1.5% of assets. When you add all this up, it is a really significant quantum of operational deposits that fuel the balance sheet and which can then be deployed by the custodian bank.

Basically, as a bank, you have a part of your balance sheet which you not only don’t have to pay for, but which actually earns you money. How good is that!

2)     Access to significant clients

Especially for the wholesale universal banks, the relationships they have with their clients (especially the asset owners) allows a different level of continual access to the client which can be leveraged competitively. The other services you want to deploy still need to be competitive and suitable, but at least you’ve got through the door to have the conversation about them.

3) Stable earnings

And of course there is the overall profitability of the business. Asset servicing is seen as an annuity style level of earnings that is stable through the economic cycle. Which is not the case for other parts of the wholesale banks. So, this is attractive too.

So, with all that said, what happened to NAS?

To consistently win business in this market, you need to be somewhere in the top-four. Outside of this and you have to do something unusual to win any business let alone on a consistent basis.

The real challenge seems to be how to get access to the range of capabilities that are required at a reasonable cost (e.g. for derivatives or private market assets). The global firms do this by leveraging global platforms into Australia, which means that the up-front investment is defrayed over a much wider client base and this makes the investment economic. Trying to make these investments for just the Australian market standalone is really tough.

In my view, NAS has been fighting hard against the tide. However, the overall complexity is a debt that has to be paid and with IOOF (now Insignia) buying the MLC business, the large anchor client that (probably) covers the majority of the fixed costs for the overall business is no longer guaranteed. When Insignia consolidates their book (which is inevitable), it is very hard to imagine NAS being the successful winner versus J.P. Morgan and BNP Paribas (the incumbents for the other parts of the Insignia book).

So, if the loss of MLC is inevitable, the overall NAS business is (probably) no longer commercially viable. The balance sheet secured from the asset servicing business is fantastic, but it is no longer coming with consistent expectation of positive earnings.

And so now we have a controlled run off as the only way to shut up shop.

Vale NAS, Rest in Peace.