Largest Custody Banks Overcome Industry Headwinds To See Further Growth

by Trefis Team
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BNY Mellon
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The world’s four largest custody banks had more than $114 trillion in assets under custody and administration (AUC/A) at the end of Q1 2018 – representing an increase of more than 10% compared to the figure of $103 trillion a year ago. Notably, the figure also increased sequentially despite a reduction in market value across asset classes for the quarter. This quarter-on-quarter asset base growth was partly due to positive foreign exchange movements (as the U.S. Dollar softened over the period), while new mandates secured by the banks helped boost their total assets under custody.

As shown in the table below, total AUC/A for these four banks increased by more than 10% y-o-y, with market leader BNY Mellon reporting a growth rate of 9.5%, while second-ranked State Street saw its asset base swell by almost 12% y-o-y. Details about the impact of changes in custody assets on the banks’ valuations are available in our interactive dashboards for BNY Mellon and State Street.

AUC/A figures for individual banks are taken from their quarterly earnings releases. While BNY Mellon reports only total AUC/A figures as a part of its quarterly earnings, JPMorgan and Citigroup exclude assets under administration (AUA) from their reporting – providing only AUC numbers. State Street details its AUC/A as well as AUC figures at the end of each quarter. The table above assumes that JPMorgan had $4.1 trillion in assets under administration in both quarters. The AUA figure for Citigroup is estimated to be around $1.6 trillion.

We believe that State Street’s above-average growth is primarily because of the growing popularity of exchange-traded funds (ETFs) globally. As State Street is one of the top three players in the rapidly growing ETF industry, and as the bank’s asset management arm relies on its own asset servicing arm for custody banking services, rapid growth in ETFs should translate to higher AUC/A figures for it going forward.

The table below details the change in AUC/A for these custody banking giants over the last five quarters:

As the custody banking business is characterized by slim operating margins, the industry is extremely concentrated, with incumbents looking to improve profitability through acquisitions in order to achieve greater economies of scale. Notably, the four largest custody banks are all based in the U.S., and are responsible for nearly half of total global custody assets. While BNY Mellon and State Street are primarily focused on custody banking services to make money (with these services contributing 45-50% of their values, according to our estimates), JPMorgan and Citigroup have extremely diversified business models, with custody banking services being responsible for less than 5% of their valuation.

You can find additional info in our interactive dashboard for State Street | Bank of New York Mellon

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