Higher BNY Mellon’s Asset Servicing Fee Could Add to Upside
The Bank of New York Mellon (NYSE:BK) primarily competes with State Street (NYSE:STT), JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C) in the asset servicing business. The asset servicing fee charged by BNY Mellon (NYSE:BK) was volatile from 2007 to 2009. Due to the long-term nature of asset servicing contracts, BNY Mellon is likely to give discounts on servicing fees in the short run to attract more clients. Additionally, with the rise in assets under custody, we expect to see a drop in servicing fees as economies of scale come into play with the asset industry becoming more technology-intensive.
We currently have a Trefis price estimate of $35.72 for The Bank of New York Mellon Corp.’s stock, which is about 12% ahead of the current market price.
Discounted Fee on Asset Servicing Contracts to Attract Funds
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Institutional investors generally have a more structured and stable investment strategy compared to retail investors. As the financial services industry as a whole recovers from the recessionary 2008-09, we expect fund managers and corporations to renegotiate contracts with custodian banks in the short-term (2010-12). The discounted fee can be compensated by other value-added services such as trading and securities financing (securities lending and collateral management). Since the 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.
Economies of Scale to Reduce Servicing Costs
The custody industry essentially involves the processing and dissemination of information on customers’ securities holdings and transactions along with value-added services that provide liquidity, financing and yield enhancing solutions (ie. analytics and returns from securities lending) to clients. All of these require large investments in information technology. Once the technology investment is made, processing additional volumes require minimal incremental costs.
Our complete analysis for The Bank of New York Mellon Corp.’s stock is here.
Trefis Community Forecast
Trefis members forecast BNY Mellon’s servicing fee as a percentage of assets under custody will increase from 0.0127% in 2011 to 0.0148% by the end of the Trefis forecast period, compared to the flat baseline Trefis estimate of 0.0112% over the same period. The member estimates imply an upside of 6% to the Trefis price estimate for The Bank of New York Mellon Corp.’s stock.