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UPDATE 2-Credit Agricole and Santander to combine custody and asset servicing arms

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UPDATE 2-Credit Agricole and Santander to combine custody and asset servicing arms

* New entity to have $3.8 trillion assets under custody

* Agricole to hold majority of new entity (Adds fund manager comment and more detail)

By Sudip Kar-Gupta

PARIS, April 17 (Reuters) – France’s Credit Agricole and Spain’s Santander plan to combine their custody and asset servicing operations to create a business with around $3.8 trillion of assets under custody and close the gap on European leaders.

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The banks said in a joint statement the new entity would have about 3,340 billion euros ($3.8 trillion) in assets under custody and about 1,833 billion euros in assets under administration

Banks’ custodian services businesses look after assets for clients in return for fees

Credit Agricole will own 69.5 percent of the merged unit, which will keep the brand name of Agricole’s existing asset management arm – Caceis. Santander will hold 30.5 percent

Santander’s ‘S3’ Securities Services arm in Spain and Latin America will also be combined with Caceis

Low profitability among European banks has sparked calls from officials at the European Central Bank and investors for cross-border consolidation, but regulatory issues and political opposition to foreign takeovers have stymied deals so far

Joint ventures in areas such as fund management can thus provide an easier option, allowing banks to benefit from scale by collaborating on business lines without having to go into any full-blown takeovers

Santander and Credit Agricole’s combined custody operations would make them one of the largest European players behind BNP Paribas, HSBC and SocGen, while also creating a stronger competitor to U.S. leaders such as State Street

“I welcome any consolidation in the European banking sector,” said Clairinvest fund manager Ion-Marc Valahu, who owns a position in the European banking index

“We use Caceis for our funds and it makes sense for CA to take over the custody and asset-servicing operations from Santander. In addition, Credit Agricole is increasing its foot print in Spain and Latin America,” added Valahu

Santander said it would see a capital gain of around 700 million euros from the deal

“S3 and CACEIS are highly complementary businesses, and by working together we can create a custody and asset servicing platform that leverages our collective scale and global presence, and offers clients a comprehensive service that can support their ambitions and help them to prosper,” said Santander Chairman Ana Botin

The tie-up comes amid other potential European bank deals

Germany’s Commerzbank and Deutsche Bank are in merger talks, while Italy’s Unicredit has also said it could explore a deal with Commerzbank. A German magazine said ING had also approached Commerzbank.