Asset Servicing Fees an Engine of Growth for BNY Mellon
The Bank of New York Mellon Co. (NYSE: BK) is a financial holding company, providing investment servicing (like asset servicing, issuer services, clearing services) and investment management services to institutional investors, which includes mutual funds, collective investment funds and other investment pools, corporate and public retirement plans, insurance companies, foundations, endowments and investment managers, around the world. BNY Mellon primarily competes with State Street (NYSE:STT), JP Morgan Chase (NYSE:JPM) and Citigroup (NYSE:C).
The improvement in security servicing fee was driven primarily by higher asset servicing fee revenues which increased 41% over the same period last year. Higher asset servicing fee in 2010 was driven by an increase in market value of assets under custody as well as a rise in asset servicing fees as a percentage of assets under custody (AUC).
We estimate that the asset servicing business is BNY Mellon’s largest division making up 29% of our $35.72 Trefis price estimate for BNY Mellon’s stock.
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Asset Servicing Fees
BNY Mellon’s asset servicing fee as a percentage of AUC has historically varied between 1 -1.2 basis points and is among the lowest in the industry. In 2010 BNY Mellon reported a rise of 0.1 basis points in its assets servicing fee.
While we estimate that BNY Mellon will continue to grow its AuC, we forecast that it will continue to offer competitive asset servicing fee to draw new businesses. Below we discuss the factors that will allow BNY Mellon to offer asset servicing at competitive rates:
1. Discounted Fees to Attract Assets & Cross Selling Opportunities
Institutional investors have a more structured and stable investment strategy in general compared to retail investors. As the financial services industry recovers from the recessionary period, we expect fund managers and corporations to renegotiate contracts with custodian banks in the short-term (2010-12).
By offering discounted fees, BNY Mellon can make up fees in other areas like trading and securities financing (securities lending and collateral management). Since contracts with institutional clients are long-term in nature, we expect BNY Mellon to offer highly competitive investment servicing fee to attract assets for custody.
2. A Technology-Intensive Industry and the Impact of Economies of Scale
The custody industry essentially involves processing and disseminating information on customers’ securities holdings and transactions along with value-added services that provide liquidity, financing and analytical services to clients, all of which require large investments in information technology.
Once the technology investment has been made, processing additional volumes requires minimal incremental cost. As a result, as assets under custody grow, we foresee a drop in servicing fee as a % of AUC.
However, a gradual rise in BNY Mellon asset servicing fee, keeping in line with 2010 growth, to 1.5 basis points of AuC will result in an upside of 7% to our $35.72 Trefis price estimate for BNY Mellon’s stock.
See our full analysis of BNY Mellon’s stock.