Q2 2015 U.S. Banking Review: Custody Banking Assets

+8.81%
Upside
57.62
Market
62.70
Trefis
BK: Bank of New York Mellon logo
BK
Bank of New York Mellon

Custody banks have had a strong run over recent quarters, as a marked increase in demand for their services has helped their fee revenues reach unprecedented levels. This has helped them mitigate the impact of lower interest incomes on their top lines to a great extent, even as they work on improving overall profitability by cutting costs. Given the fact that the largest custody banks in the world – Bank of New York Mellon (NYSE:BK), JPMorgan Chase (NYSE:JPM), State Street (NYSE:STT) and Citigroup (NYSE:C) – are all based out of the U.S., their performance over the first two quarters of 2015 has been particularly commendable, as they faced significant headwinds from the sharp appreciation in the value of the U.S. dollar.

In this article, we focus on the assets under custody for these four banks – which together account for roughly two-thirds of the global custody industry. In addition to detailing the trends seen in the asset base of each of these banks over the last couple of years, we also provide our outlook for custody assets in the near future.

See the full Trefis analysis for BNY MellonJPMorganState StreetCitigroup

Relevant Articles
  1. Up 32% In The Last 12 Months, Where Is BNY Mellon Stock Headed?
  2. Underperforming The S&P by 10%, Where Is BNY Mellon Stock Headed?
  3. Rising Only Half the S&P’s Gain In 2023, Where Is BNY Mellon Stock Headed?
  4. Is BNY Mellon Stock Fairly Priced?
  5. What To Expect From BNY Mellon Stock?
  6. BNY Mellon Stock Is Trading 11% Below Its Fair Value

Over recent years, there has been a marked increase in the demand for custodian services worldwide due to the added complexity in compliance and reporting requirements. The stricter regulatory rules have compelled financial institutions to approach custody banks to take care of accounting, back-office and middle-office activities. The resulting increase in the size of assets under custody for the world’s largest custodians has driven top line growth by boosting fee-based revenues.

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 2013. The data has been compiled using figures reported by the individual banks as part of their quarterly announcements.

(in $ bil) Q1’13 Q2’13 Q3’13 Q4’13 Q1’14 Q2’14 Q3’14 Q4’14 Q1’15 Q2’15
BNY Mellon 22,700 22,600 23,800 24,000 24,400 25,000 24,800 25,000 25,000 25,100
State Street 18,588 18,881 19,206 20,441 20,996 21,687 21,707 21,656 21,978 22,064
JPMorgan 19,294 18,929 19,736 20,465 21,135 21,659 21,245 20,549 20,561 20,497
Citigroup 13,500 13,400 13,900 14,500 14,700 15,400 15,000 16,200 16,000 15,500

It should be noted that unlike the other three banks, BNY Mellon sums 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 $3.5 trillion over the period, and have 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.

AUC15Q2

The asset bases 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. Although each of the banks have witnessed notable inflows over recent quarters, their total portfolios have suffered from negative market valuations as well as unfavorable currency movements.

BNY Mellon maintains a strong grip on the industry, with a $3-trillion lead over second-placed State Street. However, it should be noted that BNY Mellon’s diversified geographical presence also makes its asset base more sensitive to currency fluctuations than most of its competitors – which also affects Citigroup. 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 around $9 trillion in custody assets.

With equity markets remaining strong over the third quarter of the year, and with currency exchange rates showing signs of stabilizing, we expect the quarter-on-quarter reductions to subside this quarter. Going forward, when the Federal Reserve eventually hikes interest rates later this year, the improved valuation in debt markets will be the primary driver of growth for custody banking assets early next year.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Assets under Administration, Fund Services []