BNY Mellon Adds $770 Billion To Its Custody Assets With T. Rowe Price Deal

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In what is one of the largest deals of its kind in recent years, Bank of New York Mellon (NYSE:BK) signed an agreement with investment management firm T. Rowe Price to provide the latter with portfolio and fund accounting services. [1] T. Rowe Price’s investment operations reported assets worth $770 billion at the end of Q1 2015, and the agreement will essentially make BNY Mellon the administrator for these assets – boosting the size of assets under custody/administration (AUC/A) for the custody banking giant to well over $29 trillion. As a part of the deal, roughly 220 employees will also be transferred from T. Rowe Price to BNY Mellon.

We maintain a $44 price estimate for BNY Mellon’s stock, which is slightly ahead of its current market price.

See our full analysis for BNY Mellon here

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As the world’s largest custody bank, BNY Mellon generates a bulk of its total value through its asset servicing business. The business is responsible for safekeeping assets for clients and for enhancing the administration of their investments through services that process, monitor and measure global data. As seen in the chart above, BNY Mellon’s asset servicing arm contributes 26% of the bank’s total share value as a part of its larger investment servicing division. The key driver behind this is the steady increase in the size of the bank’s assets under custody and administration (AUC/A) over the years.

BNY_AUC_15Q1

As seen in the chart above, BNY Mellon’s custody asset base has grown from less than $10 trillion in early 2005 to $28.5 trillion at the end of Q1 2015. The most notable jump came in Q3 2007 when Bank of New York acquired Mellon Financial. The deal added almost $8 trillion in new assets to BNY’s legacy asset base. Although the figure fell to a low of $19.5 trillion in Q1 2009 as a result of the economic downturn, a steady improvement in asset valuations combined with additional custody mandates helped this figure grow over recent years. It must be mentioned here that BNY Mellon’s diversified geographical presence makes its asset base very sensitive to currency fluctuations. This is why the asset base appears largely stagnant over the last four quarters despite strong net inflows for the period.

Notably, an important factor behind the increase in the demand for custodian services since the economic downturn has been the stricter regulatory requirements adopted by regulators around the globe. The added complexity in compliance and reporting requirements have compelled financial institutions to approach custody banks to take care of accounting, back-office and middle-office activities. The recently announced deal between BNY Mellon and T. Rowe Price is just another example of this trend, as investment managers are keen on outsourcing most of their administrative duties in order to focus their efforts on improving returns. The resulting increase in the size of assets under custody for global custody banks has, in-turn, driven top line growth by boosting fee-based revenues. You can see how an increase in custody assets impacts BNY Mellon’s share price by making changes to the chart below.

On completion, the deal will add $770 billion to BNY Mellon’s AUC/A. With equity markets witnessing a strong rally over recent quarters, and with the greenback losing some value against other major currencies, we expect a notable increase in BNY Mellon’s asset base over the second quarter. As the Fed is expected to hike benchmark interest rates later this year, there should be a strong increase in inflows over subsequent quarters too – lending support to our estimate of BNY Mellon’s asset base crossing the $30-trillion mark early next year.

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Notes:
  1. BNY Mellon to Provide Portfolio and Fund Accounting Services to T. Rowe Price Under Strategic Support Agreement, BNY Mellon Press Releases, Jun 2 2015 []