Custody banks: unglamorous plumbers can offset fee pressure

Custodian banks are often compared to unattractive plumbers working behind the scenes of finance. The largest of these stand-alone players, Bank of New York Mellon, State Street and Northern Trust, make money by providing back office services to institutional investors and fund managers.

Their work may not be flashy, but their share is nothing. This year, the shares of the three companies rose 28-35%, outpacing the S & P 500’s 26% rise and JP Morgan’s 27% rise.

For investors, the low-margin operations performed by custodian banks are traditionally considered safe due to their stable and stable nature. However, that assumption is challenged as asset managers, who are being squeezed by the shift from active funds to low-cost passive funds, are demanding lower fees.

Blackrock this week Pull most of its ETF assets It’s out of State Street storage because it seems to reduce the cost of back office operations. Instead, we will shift 40% of our $ 2.3 trillion US ETF holdings to Citigroup, 30% to JP Morgan and 15% to BNY Mellon.

But investors don’t have to panic yet. State Street considers the BlackRock business, which has lost about 1.5% of its commission revenue in 2020, or $ 140 million. The Boston-based group is gaining more new business than it loses.Its custody assets Reach $ 43.3 trillion At the end of September, it increased by $ 6.7 trillion year-on-year.

Service charges in the third quarter were up 7% to $ 1.4 billion. Profit margin before tax increased by 480 basis points due to efforts in high-margin services such as data analysis and front office software.

State Street Global Advisors, the bank’s own asset management business, benefiting from rising stock markets and ETF inflows, should be further boosted by rising interest rates next year.

Custodian banks can be called the “worst oligopoly in the world” because they cannot raise prices. However, it does not reduce profitability.

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Custody banks: unglamorous plumbers can offset fee pressure Source link Custody banks: unglamorous plumbers can offset fee pressure

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