Q1 2015 U.S. Banking Review: Custody Banking Assets

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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.

However, the last three quarters have been a mixed period for global custody banks, as the positive impact of new mandates has been largely mitigated by the sharp appreciation in the value of the U.S. dollar. In this article, we focus on the assets under custody for the four largest custody banks – Bank of New York Mellon (NYSE:BK), JPMorgan Chase (NYSE:JPM), State Street (NYSE:STT) and Citigroup (NYSE:C) – which together account for nearly two-thirds of the global custody industry.

See the full Trefis analysis for BNY MellonJPMorganState StreetCitigroup

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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 Q3’14 Q4’14 Q1’15
BNY Mellon 22,100 21,600 22,800 22,700 22,700 22,600 23,800 24,000 24,400 25,000 24,800 25,000 25,000
State Street 16,912 16,387 17,287 17,806 18,588 18,881 19,206 20,441 20,996 21,687 21,707 21,656 21,978
JPMorgan 17,868 17,665 18,219 18,835 19,294 18,929 19,736 20,465 21,135 21,659 21,245 20,549 20,561
Citigroup 12,500 12,200 12,800 13,200 13,500 13,400 13,900 14,500 14,700 15,400 15,000 16,200 16,000

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 $3.5 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.

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, it is clear that except for a handful of quarters (including the three most recent periods) the asset base has seen steady growth. A majority of this growth can be attributed to appreciation in equity markets around the globe. The jump over the Q2 2013 – Q2 2014 period also stands out, as 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 almost $21 trillion.

BNY Mellon maintains a strong grip on the industry, with a $3-trillion lead over second-placed State Street at the end of 2014. However, it should be noted 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 few quarters. State Street was the only bank to witness a sizable increase in asset size over Q1 2015. Notably, JPMorgan’s comparatively weaker performance since Q2 2014 has helped State Street consolidate its position at the #2 spot in this list.  Citigroup came in at a rather distant fourth with $16 trillion in assets under custody, with the globally diversified banking group also reporting the largest decline in assets last quarter. However, 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 less than $9 trillion in custody assets.

With equity markets witnessing a strong rally over the second quarter, and with the greenback losing some value against other major currencies, we expect a notable increase in these banks’ asset bases for the period. The primary driver of growth later this year is expected to be improved valuation in debt markets from a hike in benchmark interest rates from the Fed.

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