Case study by Elizabeth Wine

Several years past its 200th birthday, State Street is one of the big six global custodians. With $6,200bn assets under management, the Boston-based company is number two behind Bank of New York. But its officials believe the bank is the true leader in what counts - value-added services.

"It's not the assets you have under custody, it's the services you render to the owners of those assets," says Ron Logue, head of the bank's custody department.

As the business of keeping track of clients' securities, safekeeping and settlement, becomes more commoditised, State Street believes the future lies in providing added services such as more customised reporting and information delivery.

"Customers assume the trade is settled in Thailand, but want sophisticated risk data," says David Spina, president and chief executive.

Having spent prodigious amounts on state-of-the-art information technology systems, the bank is able to extrapolate that kind of information from the reams of client data it is privy to simply by being custodian.

Obviously, the more services it provides, the more fee-based revenue it gains. Last year the company reported $2.3bn in total fee revenue, slightly less than its larger competitors. And although profitability has dropped off a little, the business is still highly lucrative.

ost bankers are cagey about just how profitable various parts of their custody business are, but most of them, State Street included, have been rewarded for the steady, repetitive stream of revenues that come with high stock valuations - high even for the richly-valued US market of the past few years.

For instance, the valuation of mutual funds is three to five times more lucrative than basic custody, which is basically a half-basis point business, Mr Logue says.

However, there is a greater risk if a fund price is tallied incorrectly as State Street bears the financial responsibility for any losses.

The company had a head start in the mutual fund market by virtue of geography. When the first mutual fund was started in Boston in 1924, State Street acted as the custodian. Today it provides newspapers with information on more than 3,300 prices for US mutual funds, which are quoted daily, such as stocks, accounting for 25 to 30 per cent of the total listings in most newspapers. Mr Logue notes that this is five times more than State Street's closest competitor, the much smaller PNC Bank, in Pittsburgh.

Bank of New York and Chase Manhattan, which publish roughly 10 times fewer prices, rank number seven and eight, respectively.

State Street hopes that growth in services will be augmented by expansion overseas. The bank is actively wooing European clients, and Mr Spina says he has been to Europe 10 times in the past 24 months.

In Europe, the bank is strongest in the UK, the Netherlands and Switzerland, which have three of the strongest private pension systems in Europe. However, it has just short of 10 per cent of the custody market in those countries.

The bank also aims to garner most of the custody business of the UK's Lloyds, which is quitting the custody business. It is currently going through the necessary due diligence with former Lloyds customers. The company aims to raise its market share in the UK to between 20 and 25 per cent in the next two years.

ore generally, the business of safekeeping pooled assets is likely to grow as continental European governments move towards private pension schemes. Consumers are also taking matters into their own hands, as they move from a fixed-income culture towards an equity culture.

Another part of the expansion is the trend towards keeping assets on offshore tax havens, such as Dublin and Luxembourg, to reap the benefits of more lenient tax regimes. State Street, which has a market share of roughly 10 per cent in offshore business, opened a new office in Luxembourg last month.

Finally, the bank provides complex accounting services to restructuring European corporations. Building infrastructure in Asia is also a priority.</FONT>

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