Largest Custody Banks Saw Negligible Growth In Their Asset Bases Over Q2

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The total size of assets under custody and administration (AUC/A) for the four largest custody banks in the world remained largely unchanged over the second quarter of this year. Although each of these banks secured new mandates over the period, their combined custody asset base remained level at $114.2 trillion primarily due to the negative impact of a strengthening U.S. dollar on their overseas custody assets. This also nullified gains from upbeat asset valuations on the asset base over the quarter.

That said, total AUC/A for the custody banking giants increased by more than 7% year-on-year, with market leader BNY Mellon reporting a growth rate of 8%, while second-ranked State Street saw its asset base increase by a slower 6% 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.

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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 around $4.1 trillion in assets under administration in both quarters. The AUA figure for Citigroup is estimated to be around $1.6 trillion.

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.

BNY Mellon has been able to build a small lead over State Street over recent years, after a period of intense competition between the two players in 2014-15 when their custody asset bases were nearly identical. In fact, State Street also took the lead to become the largest custody bank in the world in Q3 2014 and Q2 2015. While BNY Mellon has seen growth over the years by leveraging its larger global presence, State Street has benefited from the growing popularity of exchange-traded funds (ETFs). This is because 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 have translated to higher AUC/A figures.

However, State Street’s recent decision to acquire Charles River Development should boost its custody assets considerably once the deal closes later this year. It should be noted, though, that as Charles River’s front- and middle-office solutions complement the primarily back-office custody solutions offered by these four banks, most (if not all) of the company’s $11 trillion in custody assets are very likely also a part of the total AUC/A figure shown above.

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

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