State Street or BNY Mellon: Which Custody Banking Giant Uses Its Asset Base More Efficiently?

State Street (NYSE:STT) is a custody banking giant which provides Investment Servicing (e.g. asset servicing, foreign exchange & other trading, fund services, liquidity services, securities lending) and Investment Management service to its clients. Its business model faces stiff challenges and competition from offerings by its competitors such as JPMorgan, BNY Mellon, BlackRock, Vanguard, Citigroup etc. Trefis compares 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 finds that State Street has shown higher growth rate than its peer despite having lower revenues. Further, it has performed better on important banking metrics like asset turnover ratio and CET1 capital ratio.

Trefis estimates State Street’s valuation to be $66 per share, which is slightly higher than its current market price. Our price is reinforced by State Street’s earnings release for the third quarter, with the bank surpassing consensus revenue as well as earnings estimates. Its revenues fell by 3% y-o-y to $2.9 billion which was primarily driven by challenging industry conditions, partially offset by new mandates for its custody arm. Additionally, you can see more Trefis data for financial companies here

State Street has lower revenues than BNY Mellon, but is growing at a faster rate

• 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 is expected to drop by 4.6% to $15.6 billion.
• However, bolstered by its recent acquisition of Charles River, State Street should continue to witness strong growth in revenues over coming years.

You can understand what is driving changes in revenues for State Street’s individual revenue streams, along with our forecast for the next three years in our interactive dashboard.

State Street has a better Asset Turnover Ratio than BNY Mellon

Asset Turnover Ratio = Revenue ÷ Average Total Asset

• State Street’s asset turnover ratio of 4.90% in 2018 is 38 basis points higher than that for BNY Mellon, signifying State Street is using its assets more efficiently.
• State Street has reported a higher asset turnover ratio than its peer in three of the last four years (except 2016).

However, BNY Mellon has offered a slightly better return on assets than its peer

Return on assets = Net Income ÷ Average Total Assets

• As of 2018, BNY Mellon’s return on assets stood at 1.12% – higher than the 0.99% figure for State Street.
• BNY Mellon has offered a better return on assets than its peer over the last 4 years, which could be attributed to its significantly higher net income.

Although State Street’s CET1 ratio was at the same level as BNY Mellon in 2018, it has reported a higher CET1 ratio than its peer over 2015-2017.

Common Equity Tier I Capital Ratio= Adjusted Common Equity ÷ Risk Weighted Assets

• In 2018, BNY Mellon’s CET1 ratio stood at 11.74% which was at the same level as the State Street’s figure. However, State Street has reported a higher CET1 ratio compared to its peer over 2015-2017.
• BNY Mellon’s CET1 ratio has consistently improved over the last 4 years, whereas this key metric is on a negative trajectory for State Street.

Additionally, a detailed comparison of revenue segments and metrics like AuC/A, AuM, operating margin, interest earning assets, and net interest margin for State Street vs BNY Mellon is available in our interactive dashboard.

Conclusion

• State Street has a higher growth rate than its peer, while BNY Mellon has higher revenues.
• State Street has a higher asset turnover ratio and a better CET1 capital ratio than that of its peer. However, BNY Mellon has reported a higher return on assets over the last 4 years due to its notably higher margin figure.

Per Trefis, State Street’s Revenues (shows key revenue components) are expected to cross $11.6 billion in 2019 – leading to an EPS of $5.83 for the year. This EPS figure coupled with a P/E multiple of 11.4x, works out to a price estimate of $66 for State Street’s stock (shows cash and valuation analysis), which is slightly higher than the current market price.

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