Global Custody Banks Continue To See Strong Growth In Asset-Base Over Q2

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The slew of stricter rules imposed by financial regulators across the globe in the aftermath of the economic downturn of 2008 has clearly had a negative impact on almost every revenue source for the banks. Ironically, though, the custody banking service received a significant boost from the tighter regulatory regime, as 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 size of assets under custody for the world’s largest custodians to grow steadily over recent years – earning them handsome fee revenues in the process.

In this article, we focus on the assets under custody for 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) – and how they have changed over the last two years. These custody banking giants are all based in the U.S. and together account for nearly two-thirds of the global custody industry. As a part of the article, we also detail our outlook for total assets under custody at these banks for the rest of the year.

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See the full Trefis analysis for BNY MellonJPMorganState StreetCitigroup

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.

(in $ bil) Q1’12 Q2’12 Q3’12 Q4’12 Q1’13 Q2’13 Q3’13 Q4’13 Q1’14 Q2’14
BNY Mellon 22,100 21,600 22,800 22,700 22,700 22,600 23,800 24,000 24,400 25,000
State Street 16,912 16,387 17,287 17,806 18,588 18,881 19,206 20,441 20,996 21,687
JPMorgan 17,868 17,665 18,219 18,835 19,294 18,929 19,736 20,465 21,135 21,659
Citigroup 12,500 12,200 12,800 13,200 13,500 13,400 13,900 14,500 14,700 15,400

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.

Notably, 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, the jump in the asset base over the Q2 2013 – Q2 2014 period is evident, with 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. A majority of this growth can be attributed to appreciation in equity markets around the globe.

BNY Mellon maintains a strong grip on the industry, boasting a $3.3 trillion lead over State Street and JPMorgan at the end of the second quarter. However, it should be remembered 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 three quarters. JPMorgan and State Street have a near-identical custody asset base of $21.7 trillion, with the two banks taking turns at the second spot in the list over recent quarters. Citigroup comes in at a rather distant fourth with just over $15 trillion in assets under custody. However, the significant strength of these four banks compared to other players in the industry should be clear from the fact that BNP Paribas, which ranks fifth worldwide, has only $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 (i.e. mutual funds, collective funds, pension products and insurance & 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 an increase in assets across the board, although collective funds showed the highest quarter-on-quarter growth of nearly 5% in Q2. Mutual funds and insurance & other products saw assets grow by roughly 3% each, followed by a 2.6% improvement in pension product assets.

For the rest of the year, we expect the primary driver of growth in these banks’ asset bases to be the expected rise in interest rates. Lower equity valuations from a price correction in the equity markets over the period could partially offset the gains. We expect the AUC figures for these four banks to end this year at a total of around $85 trillion – a 7% increase compared to the $79.4 trillion level at the end of 2013.

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