Lloyds TSB Group said Monday that it is abandoning the global custody business, setting up a potential bonanza for State Street Corp. of Boston.
Rather than selling outright its $220.9 billion of custody assets, London-based Lloyds has agreed to steer its 430 custody clients to State Street.
Financial arrangements were not disclosed, though Lloyds said the financial effects of its exit are "not expected to be significant."
Britain's fifth-largest bank, with $265 billion of assets, Lloyds is following a course that many of its competitors have taken in recent years, saying it lacks the scale to compete in the business of safeguarding and administering institutional assets.
If State Street succeeds in winning Lloyds' custody clients, the deal would be one of the largest conversions for the $53.3 billion-asset U.S. banking company. State Street also is to be custodian for Lloyds' proprietary institutional business.
The Lloyds business would create "significant critical mass" from which State Street could expand in the United Kingdom, said Ronald E. Logue, the company's executive vice president and head of global investor services. "It is a great opportunity for us."
Some analysts were skeptical, however. Less than two weeks ago, State Street said its revenue growth could slow in the second half of this year as new-business prospects shy away from making system conversions during the year-2000 changeover.
Other processing banks have acknowledged similar concerns, but State Street's stock was hammered the hardest, falling as much as 9% on July 14, the day of its statement. "They still have some work to do," said Stephen Biggar, an analyst at S&P Equity Research.
Though the Lloyds business has the potential to help boost revenues, analysts said it is possible that State Street would not win over many of the clients. It is common for clients to make their own new arrangements when their accounts are sold or transferred between custody banks.
"There is nothing to compel them to go to State Street," said Neal Epstein, an analyst at Putnam, Lovell, de Guardiola & Thornton.
Mr. Logue dismissed this concern, saying State Street would begin converting accounts immediately. "We will attempt to convert as many as possible by yearend," he said.
Observers said State Street's relatively small size has prevented it from participating in the large-scale acquisitions that have catapulted its main U.S. rivals to prominence in Europe.
With $362 billion of custody assets abroad, State Street is well behind Chase Manhattan Corp.'s $1.9 trillion of non-U.S. assets under administration, and Bank of New York Co.'s $1.1 trillion.
Overall, the banking companies are much closer in the size of their custody businesses. State Street's custody assets total $5.3 trillion, about even with Bank of New York. Chase has $6 trillion under administration.
Chase bought the $400 billion-asset global custody operation of Morgan Stanley Dean Witter & Co. last year; the latter had itself bought the business from Barclays Bank PLC of London in 1996.
Bank of New York, in a deal announced this year, is preparing to absorb $640 billion of assets under administration from Royal Bank of Scotland.
"It is clearly a positive for State Street to win the business without having to pay a large fee up front," said Gerard Cassidy, an analyst at Tucker Cleary.
Other analysts added that the arrangement is in keeping with State Street's strategy. "They have been touting their plans for international expansion," said Mr. Biggar.
State Street has been building its overseas operations, particularly in the United Kingdom, where it employs about 750 people in London and another 100 in Edinburgh, Scotland.
Lloyds TSB Securities Services employs 825. Mr. Logue said State Street would hire people in London and Edinburgh and that some jobs could go to Lloyds employees.
State Street's first operational foray into Britain came in 1998, with a deal for Royal Bank of Scotland's trustee business. Terms were not disclosed. Though a relatively small transaction, it gave State Street a base, Mr. Logue said.
"We have spent a lot of money building the technology infrastructure there over the last 18 months," he said. "Now we will have a very substantial client base to bring to those operations."
