State Street Challenging BNY Mellon As Largest Custody Bank With A 10% Jump In Assets

State Street’s assets under custody and administration (AUC/A) grew by 10% in the last year to settle at $32.1 trillion at the end of Q3 2017 – nearly closing the gap with industry leader BNY Mellon, which reported growth of 5.6% over the same period. Notably, the gap in custody assets for these banking giants was $1.3 trillion a year ago, and we believe that State Street’s exceptionally strong growth can be attributed to the growing popularity of exchange-traded funds (ETFs) globally. As State Street is one of the three largest ETF providers in the world, and as the bank’s asset management arm relies on its own asset servicing arm for custody banking services, rapid growth in ETFs has translated to higher AUC/A figures for it. In fact, we expect State Street to become the largest custody bank in the world by the end of this year.

State Street’s asset servicing segment contributes almost 70% of our $100 price estimate for State Street’s stock, with asset management, securities trading, and securities finance making up the remaining 30%.

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 $1.6 trillion.

Removing BNY Mellon’s approximately $3.5 trillion in AUA from the figures above, and using the reported AUC figures for the other banks, we estimate the market shares of these custodians below:

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 the industry. 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 see how changes to State Street’s custody asset base affects our price estimate for the bank my making changes to the chart below.

See full Trefis analysis for BNY Mellon | State Street | JPMorgan | Citigroup

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