Bullish on BNY Mellon
BNY Mellon’s (NYSE:BK) stock dropped a bit after the firm missed analyst estimates for its Q1’11 earnings on April 19. BNY Mellon primarily competes with State Street (NYSE:STT), JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C) in providing investment servicing (asset servicing, issuer services, clearing services) and investment management services to institutional investors and high net worth individuals (HNIs) around the world.
Despite the recent quarterly results, we maintain a $35.76 price estimate for BNY Mellon’s stock, about 25% above market price. We project healthy growth for the firm’s asset servicing arm.
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BNY Mellon is the Largest Asset Custodian
BNY Mellon is the largest custodian of assets in the world with $25 trillion worth of assets under custody (AuC). The asset servicing fees that BNY Mellon earns on its AuC represent the largest revenue stream for the firm, contributing more than 20% of the firm’s $13.8 billion revenues in 2010.
While we believe that asset servicing fees as a percentage of AuC will remain constant at current levels of 0.11% going forward, these fees will get a lift from our projected increase in BNY Mellon’s AuC to over $43 trillion by the end of our forecast period.
Below we highlight two key factors that will drive BNY Mellon’s AuC total:
1. Increased Role of Global Custodians Due to Cross-Border Investments and More Complex Assets
As investors increasingly invest in cross-border assets, emerging markets and more complex (structured) financial instruments they might require the presence of large global custodians above local/regional players or financial service providers’ in-house investment servicing teams. This will have a positive impact on BNY Mellon, which is already the largest custodian in the world with a presence in over 100 financial markets and over 25 countries.
2. Growth in Mutual Funds and Private Pension Plan Providers
In many countries, the state is withdrawing from its role as a primary pension provider, causing citizens to invest in defined-contribution pension plans and mutual funds. Since custody providers serve institutional investors like mutual and pension funds, this development creates promising growth prospects for custodians’ assets under custody.