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Investment Overview for BNY Mellon (NYSE:BK)
Below are key drivers of BNY Mellon's value that present opportunities for upside or downside to the current Trefis price estimate for BNY Mellon:
- Servicing Fee as a % of Assets under Custody: BNY Mellon's stock is highly sensitive to this driver primarily because the firm has huge amount of Assets under Custody ($28.6 trillion at the end of 2015). Historically servicing fees has varied as a percentage of assets under custody, but the range has been pretty limited and has actually remained at 0.014% for each of the last five years. We currently forecast the asset servicing fees to remain constant as a percentage of assets under custody. However, if increasing competition forces servicing fees down to 0.011% of assets under custody by the end of the Trefis forecast period, there could be a downside of about 6% to the Trefis price estimate.
- BNY Mellon's Assets under Custody: We currently forecast BNY Mellon's AuC will increase from $28.6 trillion in 2015 to almost $35 trillion by the end of our forecast period. However, if market valuations improve and the company is also able to attract significant fund inflows then AuC could grow at the rate of 5% annually to reach almost $45 trillion by the end of the Trefis forecast period. This would result in a 5% upside to our price estimate.
Asset & Wealth Management
- BNY Mellon's Assets under Management: We currently estimate that BNY Mellon's AuM will increase from $1.7 trillion in 2015 to almost $2.2 trillion at the end of our forecast period driven largely by improved valuations and inflows of funds from emerging markets. However, a much slower growth to only $1.8 trillion would result in a downside of 5% to the Trefis price estimate for BNY Mellon. Such a scenario can come into play as more and more investors invest through online brokerages.
The Bank of New York Mellon Corporation provides investment servicing and investment management services to institutional investors around the world. It is the world's largest custodian bank by assets. BNY Mellon's customers include mutual funds, collective investment funds, corporate and public retirement plans, insurance companies, foundations, endowments and investment managers.
Investment servicing includes asset servicing, issuer services and clearing services, while investment management refers to providing advisory services for investing and managing financial investments on behalf of clients.
BNY Mellon's main competitors include State Street, BlackRock, JPMorgan Chase and Citigroup.
- Complementary Investment Servicing and Investment Management businesses allow competitive fees
- Since BNY Mellon has an in-house investment servicing business, it is able to offer investment management service at lower advisory fees. Most asset managers have to outsource trading and execution functions to other custodian banks, and are forced to charge higher fees so as to compensate for the costs associated with custody, trading and executing transactions.
- Additionally, BNY Mellon’s Investment Servicing business helps it attract institutional clients, to whom it can provide advisory services in addition to custody of financial securities.
- Size and scale of operations
- BNY Mellon is the world's largest custodian of assets with assets under custody and administration of almost $29 trillion. It manages assets worth $1.7 trillion and is present in over 100 markets across 35 countries.
- BNY Mellon benefits from economies of scale, which enable it to dilute operating costs (those associated with people and technology setup) over a larger asset pool and investor base thereby improving operating margins.
Trends in Investment Servicing Industry:
Global custodians are entrusted with the safekeeping and processing of large volumes of securities. The rapid growth in Assets under Custody over recent years is likely to continue well into the future due to:
- Greater role of global custodians on account of cross-border investments and more complex assets
Growth in mutual funds and private pension plan providers
- Investors increasingly invest in cross-border assets, in emerging markets and in more complex (structured) financial instruments which would require the presence of large global custodians and not local/regional players or financial service providers' in-house investment servicing team.
- In many countries across the globe and mainly in emerging economies, the state is withdrawing from its role of a primary pension provider, which is causing the people to invest in defined-contribution pension plans and mutual funds. Since custody providers serve the institutional investors such as mutual and pension funds, custodians exhibit a promising growth prospects in terms of size of Assets under Custody.
Trends in the Investment Management Industry:
- Worldwide growth in demand for asset management services
Changes in Asset Management Fee Structure
- Global assets under management (AuM) reached a record $74 trillion at the end of Q2 2015, before declining slightly due to lower market valuation of securities over the second half of the year. 34 markets constitute over 95% of this total figure. As economic conditions improve, we expect fund inflows to increase.
- Additionally, growing wealth in emerging markets will likely result in additional demand for asset management services (and as a result asset servicing).
- The recent financial crisis has resulted in more transparency in the pricing of asset management services. As a result performance fees (which now looks at a longer investment horizon than before) have increased as a proportion of total fees while the advisory fee (simply charged as a percentage of AuM) is facing downward pressures for most asset classes.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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