Can BlackRock Maintain Its Profitability In 2020 Despite Expected Revenue Headwinds?

by Trefis Team
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BlackRock (NYSE: BLK) very likely incurred around $4.3 billion in 2019 on Compensation & Benefits as well as Operating Expenses (which includes general and administrative, direct fund expenses, and distribution, servicing & other costs) – slightly lower than the figure for the previous year. Trefis highlights trends in BlackRock’s Expenses over the years along with our expectations for 2019-2020 in an interactive dashboard, and finds that these 2 expense heads account for more than 85% of the company’s total expenses for a year. While we don’t expect this proportion to change in 2020, BlackRock’s focus on reining in costs is likely to result in expenses growing at a slower rate than revenues for the year. In fact, strong expense management will remain critical to BlackRock’s ability to unlock value going forward keeping in mind the fact that secular changes to the asset management industry have meaningfully weighed on revenue growth. As we detail in our interactive dashboard, BlackRock’s net income margin figure should nudge higher in 2020.

An Overview Of BlackRock’s Total Expenses

  • The company’s expense figure has increased 24% over the last three years from $8 billion in 2016 to $9.9 billion in 2018.
  • Distribution, servicing & other costs have been the largest contributor to this increase, with expenses rising from $0.6 billion in 2016 to just $1.8 billion in 2018. However, the change can be attributed to the adoption of a newer accounting standard which resulted in an equivalent increase in the recognized revenue figure too.
  • More importantly, total expenses are expected to grow at an average annual rate of 1.9% in the near term, leading it to the figure of $10.3 billion by 2020.
  • BlackRock’s Total expenses as a % of Revenue dropped from 71.6% in 2016 to 63.3% in 2017, before increasing to 69.7% in 2018 due to higher tax expenses.
  • We expect the metric to hover around the 69.8% mark in the near term.

Notably, BlackRock’s total revenues grew at an average annual rate of 13.2% from $11.2 billion in 2016 to $14.2 billion in 2018 (unadjusted for the accounting change we detailed above). The growth rate is expected to slow down to 1.9% in the near term, enabling it to cross $14.7 billion by 2020. Additional details about BlackRock’s Revenues can be found in a related interactive dashboard.

 

Breaking Down BlackRock’s Total Expenses

Compensation & Benefits:

  • Compensation & Benefits have increased from $3.9 Bil in 2016 to $4.3 Bil in 2018, driven by higher salaries.
  • It accounted for 44% of the company’s total expense in 2018, includes employee related costs, and service cost component of net benefits expense.
  • Compensation & Benefits as % of revenue has declined over the years from 34.8% in 2016 to 30.4% in 2018. Trefis estimates the metric to further reduce in the subsequent years and hover around the 29.6% mark in the near term.
  • This decrease is a result of the focus on automation and operational efficiency.

Operating Expenses:

  • BlackRock’s Operating Expenses include general and administrative (G&A) expense, direct fund expense, and distribution, servicing & other costs. Operating expenses have increased 63% since 2016, rising from $2.7 billion in 2016 to $4.4 billion in 2018, led by a $1.2 billion jump in distributions, servicing & other costs and $300 million from G&A expenses.
  • Distribution Servicing & Other Costs are driven by changes in Assets under Management (AuM) and include payments made to third parties primarily associated with obtaining and retaining client investments in certain BlackRock products. Further, other costs components include amortization of intangible assets, deferred sales commissions and restructuring cost incurred by the company. We expect this expense component to decrease slightly in subsequent years and be around $1.8 billion in the near term.
  • General & Administrative Expenses accounted for 37% of the company’s operating expenses in 2018. Further, it has increased over the last 3 years from $1.3 billion in 2016 to $1.6 billion in 2018. We expect it to further increase in the near term and be around $1.8 billion by 2020.
  • Direct Fund Expense accounted for 23% of the company’s operating expenses in 2018. It primarily consists of third-party non-advisory expenses incurred by the company related to certain funds for the use of reference data for indices, custodial services, fund accounting, transfer agent services, legal expenses, etc.

Additional details about trends in BlackRock’s operating expenses over the years are available in our interactive dashboard.

 

Income Taxes

  • BlackRock’s Income Tax Expense has decreased from $1.3 billion in 2016 to about $1.1 billion in 2018.
  • Income Tax figure saw a sharp decrease in 2017, due to $1.2 billion of net tax benefit related to the 2017 Tax Cuts and Jobs Act.
  • Income tax expense for 2018 reflected a reduced tax rate associated with the 2017 Tax Act. The effective tax rate for BlackRock stood at 20% in 2018, which was lower than the 28.9% reported in 2016.
  • Moving forward, the effective Tax rate is expected to hover around the statutory level of 21%.

 

Total Non-Operating (Income) / Expense:

To understand how BlackRock’s total non-operating (income) / expense have trended and what the outlook is, view our interactive dashboard analysis

 

Trefis has a price estimate of $501 for BlackRock’s stock (shows cash and valuation analysis) which is at the same level as its current market price (our price estimate is reinforced by the BlackRock’s earnings for the third quarter).

 

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