BNY Mellon Faces High Risk Of Stagnating Revenues Over Coming Years

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BK: Bank of New York Mellon logo
BK
Bank of New York Mellon

The Bank of New York Mellon (NYSE:BK) is the world’s largest custody bank by assets, which provides Investment Servicing (e.g. asset servicing, issuer services and clearing services) and Investment Management services to clients around the world. Its end users include mutual funds, investment funds, retirement plans, Institutional Investors, insurance companies, banks, high net-worth individuals (HNIs) etc. BNY Mellon faces stiff challenges and competition from offerings by its competitors such as State Street,  JPMorgan, HSBC and Citigroup.

Trefis details the key components of BNY Mellon’s Revenues in an interactive dashboard along with our forecast for the next three years. While total revenues have grown by 8% from $15.2 billion in 2016 to $16.4 billion in 2018, we expect headwinds in its Asset Servicing as well as Investment Management divisions to result in revenues stagnating around the $16-billion level through 2021. You can make changes to our forecast for individual revenue streams in the dashboard to arrive at your own forecast for BNY Mellon’s Revenues. Additionally, you can see more Trefis data for financial companies here.

[A] Investment Servicing revenues are expected to decrease by 4% from $12.3 billion in 2018 to $11.8 billion in 2019 due to 5% decline in Asset Servicing revenues.

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Although Investment Servicing revenues have grown by 7% from $11.5 billion in 2016 to $12.3 billion in 2018, it is expected to drop in 2019 and then improve at an average annual rate of 1.4% to cross $12.1 billion by 2021.

This segment can be sub-divided into 6 units:

  • Asset Servicing includes services like global custody, global fund services, securities lending, government securities clearance, collateral management etc. The expected drop in the unit revenues in 2019 would be driven by lower net interest income, partially offset by growth in asset servicing fees. However, improvement in net interest income should help segment revenues grow at an average annual rate of 1% over the next two years.
  • Clearing Services includes the company’s global clearing and execution businesses through its subsidiary Pershing. Its revenues have grown by 12% from $1.4 billion in 2016 to $1.6 billion in 2018. But it is expected to drop by 2% in 2019, before recovering to the 2018 level by 2021.
  • Forex & Other Trading segment refers to the revenue from Trading Services and Securities Financing. We expect the unit revenues to decrease by 6% from $732 million in 2018 to $637 million by 2021.
  • Treasury Services deals in cash management solutions, trade finance services, international payment services, global markets, capital markets and liquidity services. The unit revenues are expected to remain largely unchanged over the next three years
  • Capital Gains & Other represents fees revenue from structured products business, software licensing and maintenance, equity income from joint venture investments etc. While volatile in nature, these revenues are on a negative trajectory and are expected to drop by 40% to $83 million in 2019.
  • Issuer services are the only unit where revenues are expected to record a slight growth over the next three years. It offers corporate trust and agency services

[B] Investment Management revenues are unlikely to recover to the peak level of $4.1 billion in 2018 in the next three years

  • This division offers a broad range of asset management products (like equity, fixed income, cash and alternative) to institutional and retail clients.
  • The segment revenues have grown by 8% from $3.8 billion in 2016 to $4.1 billion in 2018 mainly driven by growth in total Assets under Management (AuM).
  • Although Total AuM is expected to grow over the next three years, intense competition in the investment management space coupled with lower asset valuations would reduce the fees as % of AuM.
  • Overall, the segment revenues would drop in 2019 by 3.3%, before improving with an average annual rate of 0.7% to cross $4 billion by 2021.

Trefis estimates BNY Mellon’s stock (shows cash and valuation analysis) to have a fair value of $50, which is roughly 10% higher than the current market price. Our price estimate incorporates changes to our forecast to account for BNY Mellon’s earnings release in mid-July.

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