- Investment Services (Asset Servicing, Issuer Services, Clearing Services, Treasury Services, Forex & Other Trading, Capital Gains & Other) constitute 78% of the Trefis price estimate for BNY Mellon's stock.
- Investment Management constitutes 22% of the Trefis price estimate for BNY Mellon's stock.
WHAT HAS CHANGED?Growth in mutual funds and private pension plan providers
Latest EarningIn Q4 2020, BNY Mellon reported an EPS figure of $0.96 and total revenues of $3.8 billion. Its total revenues were 20% lower than the year-ago period, mainly driven by a 22% decrease in total Fees revenue and a 17% decline in net interest income.
Impact of coronavirus outbreak BNY Mellon is the world’s largest custodian bank by assets. It generates around 75% of its revenues from the Investment Servicing business and has roughly $41.1 trillion in Assets under Custody & Administration (as per 2020 data). The company could suffer losses due to a drop in asset valuations driven by net market losses, as it generates most of its revenues in the form of asset servicing fees, which are charged as a percentage of Assets under Custody & Administration (AUC/A).
Notably, the recent rally in the securities market has improved the asset valuations to a large extent. While the company’s revenues for Q1 and Q2 2020 saw some increase, Q4 revenues were 20% lower than the year-ago period. We believe that the Q1 FY2021 revenues will likely follow the same trend.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICEBelow are key drivers of BNY Mellon’s value that present opportunities for upside or downside to the current Trefis price estimate for BNY Mellon:
- Servicing Fee as a % of Assets under Custody: BNY Mellon’s stock is highly sensitive to this driver primarily because the firm has a huge amount of Assets under Custody ($35.7 trillion in 2019). Historically servicing fees has varied as a percentage of assets under custody, but the range has been pretty limited and has actually remained at 0.014% for 2016-2018, before declining to 0.013% in 2019. We currently forecast the asset servicing fees to slightly drop in the coming years.
- BNY Mellon’s Assets under Custody: We currently forecast BNY Mellon’s AUC will increase from $35.7 trillion in 2019 to almost $37.5 trillion by the end of our forecast period. However, if market valuations improve and the company is also able to attract significant fund inflows, then AuC could grow at the rate of 5% annually to reach almost $50 trillion by the end of the Trefis forecast period. This would result in a 5% upside to our price estimate.
Asset & Wealth Management
- BNY Mellon’s Assets under Management: We currently estimate that BNY Mellon’s AuM will increase from $1.9 trillion in 2019 to around $2 trillion at the end of our forecast period driven largely by improved valuations and inflows of funds from emerging markets. However,if the figure hover around the current number throughout the Trefis forecast period, it would result in a downside of 2% to the Trefis price estimate for BNY Mellon. Such a scenario can come into play as more and more investors invest through online brokerages.
BUSINESS SUMMARYThe Bank of New York Mellon Corporation provides investment servicing and investment management services to institutional investors around the world. It is the world’s largest custodian bank by assets. BNY Mellon’s customers include mutual funds, collective investment funds, corporate and public retirement plans, insurance companies, foundations, endowments, and investment managers.Investment servicing includes asset servicing, issuer services, and clearing services, while investment management refers to providing advisory services for investing and managing financial investments on behalf of clients.BNY Mellon’s main competitors include State Street, BlackRock, JPMorgan Chase, and Citigroup.
SOURCES OF VALUE
- Complementary Investment Servicing and Investment Management businesses allow competitive fees
- Since BNY Mellon has an in-house investment servicing business, it is able to offer investment management service at lower advisory fees. Most asset managers have to outsource trading and execution functions to other custodian banks and are forced to charge higher fees so as to compensate for the costs associated with custody, trading, and executing transactions.
- Additionally, BNY Mellon’s Investment Servicing business helps it attract institutional clients, to whom it can provide advisory services in addition to the custody of financial securities.
- Size and scale of operations
- BNY Mellon is the world’s largest custodian of assets with assets under custody and administration of more than $33.7 trillion. It manages assets worth $1.8 trillion and is present in over 100 markets across 35 countries.
- BNY Mellon benefits from economies of scale, which enable it to dilute operating costs (those associated with people and technology setup) over a larger asset pool and investor base, thereby improving operating margins.
KEY TRENDSTrends in the Investment Servicing Industry:Global custodians are entrusted with the safekeeping and processing of large volumes of securities. The rapid growth in Assets under Custody over recent years is likely to continue well into the future due to:
- Greater role of global custodians on account of cross-border investments and more complex assets
- Investors increasingly invest in cross-border assets, in emerging markets and in more complex (structured) financial instruments that would require the presence of large global custodians and not local/regional players or financial service providers’ in-house investment servicing team.
- In many countries across the globe and mainly in emerging economies, the state is withdrawing from its role as a primary pension provider, which is causing the people to invest in defined-contribution pension plans and mutual funds. Since custody providers serve the institutional investors such as mutual and pension funds, custodians exhibit promising growth prospects in terms of the size of Assets under Custody.
Trends in the Investment Management Industry:
- Worldwide growth in demand for asset management services
Changes in Asset Management Fee Structure
- Global Assets under Management (AUM) are growing at a rapid pace. However, a shift in investor preferences towards index & ETF funds and cut-throat competition can impact the AUM growth of traditional players like BNY Mellon.
- Additionally, growing wealth in emerging markets will likely result in additional demand for asset management services (and, as a result, asset servicing).
- The recent financial crisis has resulted in more transparency in the pricing of asset management services. As a result, performance fees (which now looks at a longer investment horizon than before) and advisory fee (simply charged as a percentage of AuM) are facing downward pressures for most asset classes.