Establishing a presence in China is slow going, but Northern Trust Corp., which recently won approval for a Beijing branch office, believes the payoff will be worth the wait.
"We're excited about the market that exists and is growing in China for the kinds of capabilities we offer," said Steve Fradkin, president of corporate and institutional services at Northern Trust, which has about $3.5 trillion of assets under custody and about $600 billion under management.
The Chicago-based trust bank has had what's known as a representative office in Beijing for five years; it has about a dozen employees in the city. Approval for the branch means it will now be able to do business directly with Chinese clients — rather than serving them through locations in Hong Kong and Singapore.
China, Fradkin said, is "a growth market we like. We want to make a bigger, more local commitment to strengthen the relationships we have with our clients, and to earn more clients."
China has a population of 1.3 billion and a fast-growing GDP that recently made it the world's second-biggest economy. And its investment assets are growing fast — McKinsey & Co. estimated in 2007 that assets under management in China would rise 24% a year for the next decade.
Northern Trust's focus in China is on providing asset servicing to institutional clients. Its asset servicing business caters to sovereign wealth funds, insurance companies, endowments, mutual funds and other big investors, providing them with custody, trade settlement, portfolio valuation and a host of administrative services.
Northern Trust's corporate and institutional services arm already has a sizable operation in the Asia-Pacific region. At the end of 2009 the region accounted for $46.4 billion, or 10%, of the unit's assets under management. Assets under custody in the region grew by 80% in 2009, to $264 billion, and now account for 8% of its overall custodied assets. The company won't reveal asset figures specifically for China.
Northern Trust has more than 2,000 employees at its offices in Beijing, Hong Kong, Singapore, Tokyo, Melbourne and Bangalore. It has had an office in China since 2005, and has had ties to partners in the country since 1999. It received branch-license approval late in August from the China Banking Regulatory Commission.
The deliberate process by which Northern Trust and other foreign financial firms enter China reflects dual priorities on the part of the Chinese government, said Michael Kon, senior analyst with Morningstar Inc.
On one hand, officials want to shelter successful domestic financial businesses such as commercial banks. On the other, they want to tap foreign firms to provide needed expertise — and that's where Northern Trust comes in, Kon said.
"It shows they do understand that Northern Trust can offer more services than the local private bank," he said.
Northern Trust is focusing on a particular niche within the Chinese market: institutions that are investing money outside the country. That approach makes sense given the bank's international scope, Kon said.
"Most of the value foreign institutions can bring to the Chinese market is connections with other markets," he said. "I think for that they will be welcomed."
Northern Trust already has a "very attractive client base" in China, Fradkin said. "It's still early days, but we're working with some of the key institutions in China."
It has a "great anchor client" in China's National Council for Social Security Fund, Fradkin said. It has been consulting since 2002 with the organization in preparation for its investment in overseas equities markets.
Chinese institutions have traditionally not invested outside the country. With China's young social security system beginning to do so, global custody and asset services are in demand, Fradkin said.
Northern Trust's growth in China will have to be organic, since local firms don't have the capabilities that the company needs. "There are not likely to be acquisitions, because it's not a local industry," Fradkin said. "It will be more direct and in partnership and cooperation with some of the local institutions."
Northern Trust has offices in 16 international locations, spanning North America, Europe, the Middle East and the Asia-Pacific region.