Which Custody Banking Giant Is In Better Shape: BNY Mellon or State Street?

The Bank of New York Mellon (NYSE:BK) is the world’s largest custodian bank which provides Investment Servicing and Investment Management services to institutional investors around the world. Trefis has a price estimate of $51 for BNY Mellon’s stock which is roughly 10% higher than its current market price. Our price estimate is reinforced by BNY Mellon’s earnings release for the third quarter, with the bank surpassing consensus earnings estimates. It reported total revenues of $3.86 billion – down 5% year-on-year due to a 9% decline in Investment Management and Performance Fees coupled with an 18% decrease in Net Interest Income. Notably, BNY Mellon did well to reduce non-operating expense 5% y-o-y – offsetting the impact of lower revenues on the bottom line.

BNY Mellon’s business model faces stiff challenges and competition from offerings by its competitors such as JPMorgan, State Street, BlackRock, Vanguard, Citigroup etc. We have compared trends in key operating metrics for State Street vs BNY Mellon over the last 4 years, along with our forecast for 2019 in an interactive dashboard, and found that BNY Mellon has higher revenues and better operating margin than its peer. BNY Mellon has maintained its lead primarily due to notably higher Investment Management revenues. Additionally, you can see more Trefis data for financial companies here.

BNY Mellon has higher revenues, but it is growing at a slower rate than State Street

• State Street reported total revenues of $12 billion in 2018, which was 27% less than the total revenues of $16.4 billion for BNY Mellon.
• Both banks are heavily dependent on Investment Servicing segment, as it has contributed more than 70% of the total revenues over the last 4 years.
• State Street has reported a higher growth rate over the last 4 years, as compared to its peer. Its average annual growth rate was 5%, whereas BNY Mellon’s figure was around 3%.
• We expect both the banks to report a decline in revenues in 2019. While State Street’s revenues would reduce by 3.5% to $11.6 billion, BNY Mellon would drop by 4.6% to $15.6 billion.

Our interactive dashboard for BNY Mellon’s revenues details what is driving changes in revenues of BNY Mellon’s individual revenue streams, along with our forecast for the next three years?

BNY Mellon’s Operating Margin is better than that of State Street

• Although operating margins for both the banks have fluctuated over the last 4 years, BNY Mellon’s figure was significantly higher than that of its peer.
• This implies that BNY Mellon’s operations are more efficient than that of State Street’s

BNY Mellon has higher Investment Servicing revenues and better segment operating margin than it peer

• State Street’s segment revenues have increased 9% from $9.2 billion in 2015 to $10 billion in 2018. On the other hand, BNY Mellon’s figure has grown 10% from $11.2 billion to $12.3 billion over the last 4 years.
• BNY Mellon’s segment operating margin is considerably higher than State Street’s.

Details about how investment servicing revenues and margins for BNY Mellon and State Street have changed over the years can be found in our interactive dashboard.

Although State Street has higher Assets under Management (AuM), its investment management revenues are less than half BNY Mellon’s figure

• State Street’s segment revenues have grown 63% from $1.2 billion in 2015 to $2 billion in 2018, whereas BNY Mellon’s figure has hovered around the $4 billion mark.
• This increase for State Street can be attributed to 16% growth in AuM and improvement in advisory fee as % of AuM over the last 4 years. While BNY Mellon’s AuM has grown 8% over the last 4 years, the impact of this on the top line has bee mitigated by a decline in investment advisory fee as % of AuM.
• Although State Street’s investment advisory fee as % of AuM is on a growth trajectory, it is significantly lower than its peer because of a notably higher proportion of passive and low-cost ETF offerings (which have much lower expense ratios).

Additionally, comparison of metrics like CET1 capital ratio, asset turnover ratio and return on assets for BNY Mellon vs State Street is available in our interactive dashboard.

Conclusion

• Although BNY Mellon has higher revenues and offers more services than its peer, its growth rate is slower than State Street.
• BNY Mellon has a higher operating margin, which implies that its operations are more efficient than its peer.

Per Trefis, BNY Mellon’s Revenues (shows key revenue components) are expected to cross $15.6 billion in 2019 – leading to an EPS of $4.01 for the year. This EPS figure coupled with a P/E multiple of 12.6x, works out to a price estimate of $50.63 for BNY Mellon’s stock (shows cash and valuation analysis), which is 10% higher than the current market price.

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