The Bank of New York Mellon Co. (NYSE: BK) created a new Sovereign Institutions Group with the focus of providing asset management and advisory services as well as service assets for sovereign wealth funds, sovereign pension plans, central banks, monetary authorities and sovereign owned entities looking for professional advice to meet their future needs and growth plans. BNY Mellon primarily competes with State Street (NYSE:STT), JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C) in areas like providing investment servicing (asset servicing, issuer services, clearing services) and investment management services to institutional investors around the world.
BNY Mellon is the largest custodian in the world with $25 trillion in assets under custody as of December 2010. We estimate that the asset servicing business is BNY Mellon’s largest division contributing nearly 29% to our $35.72 Trefis price estimate for Bank of New York’s stock.
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More recently, BNY Mellon has increased its presence in the asset management industry with a number of acquisitions increasing its offerings and geographical coverage and now better competes with some of the world’s largest asset managers like Blackrock and State Street. (See BNY Mellon Focused on Asset Management Business With Recent Acquisitions)
Sovereign Institution Group at a Glance
A sovereign wealth fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, real estate or other financial instruments funded by foreign exchange assets. According to Global Finance, SWF’s assets under management are around $6 trillion and could to triple to around $20 trillion by 2020 as sovereigns diversify their portfolios through strategic overseas investments.  This provides a tremendous growth opportunity for asset managers around the world, and BNY Mellon is making moves in time to capture a share of the pie.
We believe BNY Mellon, with its presence in 36 countries and over 100 markets, is well positioned to take advantage of this upcoming market to grow its asset management business taking it to level of market leaders like Blackrock and State Street.
Potential Upside to BNY Mellon
We currently forecast BNY Mellon’s assets under management to grow from around $1.3 trillion in 2011 to $2.3 trillion by the end of our forecast period. However, if BNY Mellon manages to capture a share of the sovereign wealth market given its new initiative there could be significant upside to BNY Mellon’s assets under management. We estimate that even if BNY Mellon captures a 1% share of sovereign wealth fund assets, expected to be worth $20 trillion by 2020, its assets under management will increase by nearly $200 billion resulting in an upside of 2-3% to out $35.72 Trefis price estimate for BNY Mellon’s stock.
You can drag the trend lines above to see the impact of various assets under management scenarios on BNY Mellon’s stock.Notes: