BNY Mellon’s Central Securities Depository In Europe Gets Regulatory Green Light

BNY Mellon’s (NYSE:BK) plans to further expand its worldwide investment services offering, got a leg up last week when it was cleared by regulatory authorities to setup a Central Securities Depository (CSD) in Belgium. ^[1] The world’s largest custodian bank will be able to provide its existing and potential clients more efficient ways of transacting across continents, by availing of the issuer and safekeeping services offered by BNY Mellon CSD. More importantly, the banking group will also cater to the rising demand for settlement services in Europe through this new unit. This will help BNY Mellon capitalize on new regulations being imposed worldwide that mandate stricter settlement rules, including the compulsory involvement of a clearing house in various OTC transactions.

We maintain a $27 price estimate for BNY Mellon’s stock, which is around its current market price.

See our full analysis for BNY Mellon here

BNY Mellon boasts of being the custodian of assets worth nearly $28 trillion for its clients, making it the leader in the global custody banking business by far. And in a bid to remain at the top of the game, the banking group has been constantly working towards providing the entire gamut of financial services while leveraging its expertise in the custody business. This has allowed it to strengthen its grip on other allied services like securities issuance and clearing, which contribute to almost a sixth of its total value, as shown in the chart above.

The increased focus on tighter regulations for the financial sectors actually opened up several opportunities for financial institutions that play third-party roles, i.e. those who act as service providers to other financial institutions. And most of these services come as natural extensions of BNY Mellon’s existing business. This is what clearly prompted the bank to setup the CSD in Europe, with an eye on a larger market share in the region by providing clients low-risk issuer and settlement services for transaction between continents.

What BNY Mellon stands to gain here is pretty obvious – more business from clients, which will translate to more revenues. In particular, the establishment of the CSD will help the bank rake in more fees as a securities issuer. We represent BNY Mellon’s securities issuer fees in the chart below, and forecast a 4% annual growth in its value over the years to come. There will, however, be an upside to our share price estimate if the fees grow at a faster rate. You can make changes to the chart to understand how an increase in these fees affects BNY Mellon’s value.

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1. BNY Mellon Establishes Central Securities Depository, BNY Mellon Press Releases, Jan 7 2013 [↩]