State Street revealed in an earnings call last Tuesday its acquisition of Brown Brothers Harriman (BBH) Investor Services is becoming increasingly unlikely as regulators review changes the bank has made to the initial deal.

More than a year on from its in-principle $3.5bn agreement – which would have seen State Street overtake BNY Mellon as the world’s largest custodian – the US bank faces continued delays as regulators review modifications it has made to the original deal such as lowering the purchase price, changes to the operating model, legal entity structure and regulatory approvals required.

In its call to analysts, State Street said it was in dialogue with banking regulators about the “prolonged” review process but said the current regulatory environment for mergers and acquisitions in global systemically important banks (G-SIB) is “challenging”.

“While discussions with regulators on the proposed modified transaction are ongoing, the likelihood of a successful outcome is increasingly uncertain,” the bank said.

“There can be no assurance that a mutually acceptable modified transaction will be agreed and entered into, or as to the timing or outcome of any regulatory approvals and other closing conditions for a modified transaction.”

The deal modifications remain subject to review by BBH’s partners and State Street’s own board of directors, the bank said, with both sides able to terminate the transaction “at any time”.

Its earnings call revealed its acquisition and restructuring costs increased 8% between Q2 and Q3, “reflecting costs associated with the proposed acquisition of BBH Investor Services”.

The deadlock adds to a challenging year for the bank so far, with assets under custody (AUC) falling 18% year-on-year for the first three quarters, owing to market volatility, currency movements and a client exit.

When the deal was initially struck last September, State Street was expected to take on BBH’s custody, accounting, fund administration, global markets and technology services, as well as its $5.4trn AUC.

Previously, BNP Paribas Securities Services and Northern Trust were noted as other candidates interested in BBH’s servicing arm.

If completed, the acquisition will be State Street’s largest buy-up since it bought Charles River Development for $2.6bn in 2018.

The company’s recent earnings call came during an eventful week for the industry, with Caceis signing a preliminary agreement to acquire the European branch of RBC Investor Services.

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