VALUATION HIGHLIGHTS

1. Market and Wealth Services constitute 53% of the Trefis price estimate for BNY Mellon's stock.
2. Securities Services constitute 35% of the Trefis price estimate for BNY Mellon's stock.
3. Investment Management constitutes 11% of the Trefis price estimate for BNY Mellon's stock.

WHAT HAS CHANGED?

Latest Earning

In Q4 2023, BNY Mellon reported an diluted EPS figure of $0.33 and total revenues of $4.3 billion. Its total revenues were 10% more than the year-ago period.

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 $44.7 trillion in Assets under Custody & Administration (as per 2021 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).The bank posted total revenues of $17.5 billion in FY2023 - up 7% y-o-y.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of BNY Mellon's value that present opportunities for upside or downside to the current Trefis price estimate for BNY Mellon:

Asset Servicing

• Servicing Fee as a % of Assets under Custody: BNY Mellon's stock is highly sensitive to this driver primarily because the firm has a massive amount of Assets under Custody ($43.75 trillion (avg.) in 2022). Historically servicing fees have varied as a percentage of assets under custody, but the range has been pretty limited and has remained at 0.014% for 2016-2018 before declining to 0.009% in 2022. We currently forecast the asset servicing fees to remain around the current levels in the coming years.
• BNY Mellon's Assets under Custody: We currently forecast BNY Mellon's AUC will increase from $43.75 trillion in 2022 to around $50.2 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 $59.8 trillion by the end of the Trefis forecast period. This would result in a 2% 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 $1.95 trillion in 2022 to around $2.33 trillion at the end of our forecast period driven largely by improved valuations and inflows of funds from emerging markets. However, if the figure hovers around the current number throughout the Trefis forecast period, it would result in a downside of 3% 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 SUMMARY

The 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 securities services and market & wealth 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 can offer investment management services at lower advisory fees. Most asset managers have to outsource trading and execution functions to other custodian banks. They are forced to charge higher fees 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 $43.75 trillion. It manages assets worth $1.95 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 TRENDS

Trends 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:

1. 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.
2. Growth in mutual funds and private pension plan providers
• In many countries and mainly in emerging economies, the state is withdrawing from its role as a primary pension provider, causing people to invest in defined-contribution pension plans and mutual funds. Since custody providers serve 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:

1. Worldwide growth in demand for asset management services
• 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).
2. Changes in Asset Management Fee Structure
• 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 (charged as a percentage of AuM) are facing downward pressures for most asset classes.