Global Custody Banks See A Decline In Assets Under Custody In Q3

As U.S. financial services firms detailed their performance figures for the third quarter last month, a clear trend emerged for most asset custodians or asset managers: their portfolios shrunk in Q3 2014 compared to the previous quarter. This was largely expected, as their portfolios took a hit when the equity market dipped lower towards the end of September, and because of the negative impact of marked changes in foreign exchange rates on asset valuations in terms of U.S. dollars. These factors nullified the impact of new mandates on the size of assets under custody for each of the world’s four largest custody banks – Bank of New York Mellon (NYSE:BK), JPMorgan Chase (NYSE:JPM), State Street (NYSE:STT) and Citigroup (NYSE:C).

That said, the global custodians have had a strong run in recent years, as the slew of stricter rules in the aftermath of the economic downturn has boosted demand for their services. This is because more financial institutions are now turning to custody banks to take care of accounting, back-office and middle-office activities in light of the added complexity in compliance and reporting requirements. This in turn has helped the assets under custody for the world’s largest custodians grow steadily – earning them handsome fee revenues in the process. In this article, we focus on the assets under custody for the four largest custody banks, which together account for nearly two-thirds of the global custody industry.

See the full Trefis analysis for BNY Mellon | JPMorgan | State Street | Citigroup

The table below summarizes the total assets under custody for each of the four biggest custody banks at the end of each quarter since early 2012. The data has been compiled using figures reported by the individual banks as part of their quarterly announcements.

It should be noted that unlike the other three banks, BNY Mellon adds up the total size of its assets under custody (AUC) and assets under administration (AUA), to report a single “assets under custody and administration” (AUC/A) figure each quarter. To facilitate a side-by-side comparison, we have assumed that BNY Mellon’s AUA value remained constant at a figure of $3.6 trillion over the period, and deducted this number from the reported figure to arrive at the bank’s AUC. ^[1]

The graph below expands on this data to make it easier to study the trend in these banks’ AUC since early 2011.

The asset base for all these banks have largely moved in tandem over the period – something that can be understood by the fact that market-based revaluations affect assets under custody between quarters much more than net inflows or outflows for a period. Getting to the figures themselves, it is clear that except for a handful of quarters (including the most recent one) the asset base has seen steady growth. A majority of this growth can be attributed to appreciation in equity markets around the globe. The jump over the Q2 2013 – Q2 2014 period also stands out, as the combined AUC for these four banks increasing by almost 13.5% over the period. This is a considerable change, given that the the average assets overseen by these banks is nearly $21 trillion.

BNY Mellon maintains a strong grip on the industry, with a $3.1-trillion lead over second-placed State Street at the end of the third quarter. However, it should be noted that BNY Mellon’s diversified geographical presence also makes its asset base more sensitive to currency fluctuations than its competitors – which is likely a reason for the gap shrinking over the last four quarters. In fact, State Street was the only bank to report a sequential increase in assets under custody – although the increase was a negligible 0.1% quarter-on-quarter. The bank consolidated its position at the #2 spot in this list, inching ahead of JPMorgan last quarter after spending more than three years at the #3 position. Citigroup comes in at a rather distant fourth with $15 trillion in assets under custody. However, the significant strength of these four banks compared to other players in the industry is demonstrated by the fact that BNP Paribas, which ranks fifth worldwide, has less than $10 trillion in custody assets.

While none of the custody banks detail the proportion of the growth in AUC figures that come from actual inflows, currency movements and market value changes, State Street does provide a break down of the total AUC by products (mutual funds, collective funds, pension products, and insurance and other products). Given the size of each of the custody banks’ portfolios, this information can be used to generalize quarterly changes across the industry. State Street’s data shows that the decrease in assets for the industry can be attributed to a reduction in the size of mutual fund assets, which shrank more than 2% quarter-on-quarter. While collective funds, and insurance and other products remained unchanged, pension funds actually improved 4% – something that can be explained by the fact that pension funds maintain a very risk-averse portfolio with negligible exposure to equity outside the U.S.

For the fourth quarter of the year, we do not expect major changes in these banks’ asset bases, as the gains from the strong rally in equity markets are likely to be nullified by continued negative movements in foreign exchange rates. The primary driver of growth early next year is expected to be improved valuation in debt markets from a hike in benchmark interest rates from the Fed.

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1. BNY Mellon Key Facts, Global Custody Website [↩]