Santander
Santander’s vice president of securities and clearing talks to AST about the custody market in Mexico and what he sees coming down the pipeline
Santander has been in Mexico’s custody business for over 15 years and David Flores, vice president of securities and clearing at Santander (Mexico), estimates some 14 per cent market share with around $94 billion assets under custody as of August 2011.
AST: What are the most significant macroeconomic factors impacting custodians in Mexico?
David Flores: As in other markets the most macroeconomic factors as aggregated indicators: such as GDP, unemployment rates and prices index may impact flows.
The Mexican market is comparatively stable and advanced and the infrastructure is familiar to investors used to doing business in major markets. It makes Mexico the entry point into Latin America for foreign investors wanting to gain exposure to Latin America. However, Mexico would stand second to Brazil within the Latin American space.
Market capitalisation of the Brazilian market is approximately US$1,500 billion, while Mexico’s is around US$400 million. Additionally, the correlation of the Mexican economy to the US is significantly higher than Brazil’s.
Mexico’s economic fortunes are closely tied with that of the US. Periods of economic growth for the US economy are almost certainly indicators for economic growth in Mexico as well. Conversely, recessions and economic downturns in the US are also likely to have adverse effects for the Mexican economy.
AST: What are some of the microtrends in the region affecting custodians?
David Flores: We are seeing more inflows into the region, particularly from markets with a small exposure to Latin America securities, such as Europe. Brazil, where the government and public listed companies require massive funds to finance heavy investment in infrastructure, represents a large proportion of those inflows.
Investors accessing the region are made of different shapes, such as private equity firms, sovereign wealth funds, high frequency traders (HFT), wealth managers and even individuals seeking opportunities here. For instance in Brazil, we see new booming demands for structured funds such as FIP (for private equity purposes) and FIDC (trade receivable funds) which require a more sophisticated reporting.
In addition, we are going to see more cross border investment within the region. The launch of MILA project brings a unique platform for Chilean, Peruvian and Colombian investors to invest within those countries. However we believe this is only the first step towards a possible integration process of the three markets.
AST: How does Santander differentiate among other custodians?
David Flores: We believe that our main competitive advantages are the level of service that we provide regardless the size of the client and responsiveness, customer services, relationship management, liquidity and cash management, on-line and real time links with the market (SPEI and Indeval) and our in-house IT platform.
AST: How do you see the next year unfolding? What are some of the risks going forward? What are some of the opportunities?
David Flores: The custodians’ ability to maintain growth and profitability in Mexico must be based on the range of services offered which can be expected to follow the requirements of clients. So the key challenges will be to develop a variety of new, specialised and value added services provided to a specific customer segment.
Mexico will not be the exception, the different providers in the custody industry will be impacted in different ways. Because of keen competition that has resulted in progressively lower price levels, custodians of all types are faced with the challenge of revenue compression concurrent with a need to invest. This is the scenario which seems to be the risk going forward and likely to lead to further consolidation in the industry.
In Mexico, custodian banks must continuously adapt their technology because market practice, industry standards, legal requirements, fiscal processes and infrastructures’ procedures and technology are changing. Once the technology investment has been made for a capability, processing additional volumes usually adds limited marginal costs. High fixed costs mean that custodian banks require economies of scale to be profitable.
One means of gaining market share is by price competition with other custodians, which over time results in lower fees throughout the market as existing customers also benefit from the lower price levels when service contracts are renegotiated. As profit margins narrow, there is an increasing need to further invest in technology and automate more processes in order to remain profitable.
One of the strategies that some Mexican custody providers could adopt to remain viable and competitive, depending on the nature of their customer base will be using their strong franchise among domestic institutional investors that tend to have most of their investments in the home market, because these clients also have outflow investments to other markets.
Competition and consolidation has caused this segment of providers to capture new revenues via increasingly complex back-office outsourcing solutions for institutional investors, the most extensive of which involves the takeover of entire operations departments, including the personnel and technology and the capabilities to provide yield enhancing services to their investor client base, such as securities lending and tri-party repo services.
