State Street (NYSE:STT) is eying the top-spot in the global custody banking industry and keeping in mind its strong capital condition and the recent trend among European banks in cutting down on various non-core businesses, we believe the bank can actually beat out BNY Mellon (NYSE:BK) and JPMorgan Chase (NYSE:JPM) to become the industry’s biggest. It hence comes as no surprise that State Street is on the lookout to buy the custody banking unit of any European bank that wants to get rid of it. 
Our $51 price estimate for State Street is nearly 20% above the current market price. We believe that this premium is largely due to the weak short-term outlook for global custody banking, coupled with the deteriorating European debt situation.
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U.S. Banks Already Rule The Roost When It Comes To Custody Banking
State Street, with its $23.2 trillion in assets under custody and administration, is the third largest custodian bank in the world, after BNY Mellon and JPMorgan Chase who handle assets of $26.6 trillion and $25.2 trillion, respectively. In contrast, the European bank with the largest custody business is HSBC (NYSE:HBC), which manages assets of about $8 trillion. In fact, the four largest global custodians (BNY Mellon, JPMorgan Chase, State Street and Citigroup) are all based in the U.S. and together have a 60% share of the total market.
And State Street Is Hungry For More
State Street’s decision to expand its business inorganically was made evident by the bank’s chairman Jay Hooley in a recent annual meeting – a move which is seen as an offer by him to any European bank looking to exit the custody banking business. The economic turmoil in Europe has already resulted in wide-scale restructurings among most European banks, with almost all of them shifting their focus on core lending businesses while divesting any non-core business units.
Europe is also a desirable target market for State Street, as the region is forecast to show the largest growth in retirement assets outside the U.S. over the coming years. And State Street wants to be in a position to make the most of this growth. The impact of an increase in the bank’s assets under custody and administration on its overall value can be understood by making changes to the chart above.
With State Street’s balance sheet offering it as much as $2 billion for a potential acquisition, what remains to be seen is which European bank heeds this call first.Notes: