Which Custody Bank Stock Will Pay Better: State Street or BNY Mellon?

State Street (NYSE: STT) and BNY Mellon (NYSE:BK) have both seen their stock decline by roughly 14% since early February after the WHO declared the Coronavirus a global health emergency. The lockdown in various parts of the world has hurt the custody banking industry, with more weakness to come over the coming months. Additionally, asset servicing – the key revenue stream for both banks – will remain under pressure over the coming quarters due to a drop in asset valuations driven by the economic uncertainty and widespread panic as well as due to the Fed’s decision to slash interest rates to almost zero. However, we believe BNY Mellon will likely fare better than State Street.

In its recently released Q1 2020 results, State Street reported a 5% growth in revenues y-o-y. However, we believe STT’s fiscal Q2 results in July will confirm weak economic conditions and could come with 2020 revenue expectations roughly 3% lower than 2019. This could potentially result in State Street’s P/E multiple sliding to below 9.4, with the stock falling to below $50 again, as seen in March this year, if COVID-19 spread continues accelerating. BNY Mellon will likely suffer, but less so. While the revenue expectations for 2020 are around 6% less than the figure in 2019 at the time of its fiscal Q2 2020 earnings in July, a P/E multiple around 8.4x implies that the market has already factored in the revenue drop and the company’s stock could remain around current levels over the coming months.

Our conclusion is based on our detailed dashboard analysis, ‘Is State Street Expensive Or Cheap After A -13.9% Move vs. -14.4% for BNY Mellon?’ wherein we compare trends in key metrics for the two technology companies over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.

State Street And BNY Mellon Have Both Seen Their Stock Witness A Similar Slide Since Mid-February

Both State Street and BNY Mellon have a nearly-identical business model, which includes custody banking (asset servicing) and asset management units. However, while BNY Mellon has more Assets under Custody (AUC), State Street has higher Assets under Management (AUM). Due to their similar revenue segments, they face similar risks from the economic slowdown. More information about the key components of State Street’s revenues is available in our interactive dashboard.

State Street’s P/E based on 2019 earnings has declined from 14.4x in 2019 to 11.9x currently, while BNY Mellon’s multiple has declined from 10.9x to about 8.4x. However, State Street’s multiple (based on 2019 EPS) still appears to be slightly high, considering that both companies face similar revenue/margin the same risk. We believe that BK’s P/E multiple has contracted in line with the expected drop in revenues/margins. However, State Street’s P/E is still about 27% higher than the 9.4x multiple it traded at in 2018 – implying that the stock could be vulnerable.

Overall, it’s likely that BNY Mellon stock will outperform State Street. Likely that the ground reality for State Street will be confirmed during its Q2 results when weak results will be coupled with tough guidance for 2020 – especially if the outbreak hasn’t been contained by then.

Historical Performance

• Trends in Stock Price over the years: Over 2009-2019, State Street stock grew at the same rate as BNY Mellon’s Stock.
  • State Street stock went from $35.84 at the end of 2009 to $78.31 at the end of 2019, representing a change of 118.5%.
  • During the same time period, the Bank of New York Mellon went from $22.78 to $49.56, representing a change of 117.6%.
• Trends in P/E Multiple over the years: Based on trailing 2019 P/E ratios, while State Street stock looks expensive compared to BNY Mellon, it is comparable to prior years.
  • State Street’s P/E is more than its peer due to its higher annualized growth of return over 2014-19.
  • Historical Revenue Growth: STT 2014-19 annualized revenue growth of 2.7% is 2.7x that of the 2014-19 BK’s annualized Revenue growth rate of 1%.
  • Historical EPS Growth: BK 2014-19 annualized EPS growth of 15.9% is 4.8x that of the 2014-19 STT’s annualized EPS growth rate of 3.3%.

But How Long Will State Street Stock Remain Under Pressure?

The expected timeline for recovery in global economic conditions, and in State Street’s stock, hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse in later quarters of 2020. As the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of State Street’s multinational peers. The complete set of coronavirus impact and timing analyses is available here.

Overall, we believe State Street’s stock price at levels of $65 and below (the updated Trefis price estimate) provide a buying opportunity for investors willing to be patient. Further, there may be an even bigger opportunity when you compare JPMorgan to Wells Fargo.

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