From the time Bank of New York Co. and Mellon Financial Corp. announced plans to merge, in December 2006, until they completed the deal and Bank of New York Mellon Corp. was born, in July 2007, the banks combined assets under custody ballooned by $3 trillion, to $21 trillion. BNY Mellon has picked up a further $2 trillion from the merger through March 31. The growth is attributable at least in part to pension funds, mutual funds and other big investors eager to avail themselves of the economies of scale that only a custodial behemoth can offer. But smaller customers wanted in on the action too, to benefit from the state-of-the-art technology that bigger investors demand.
Clients like big. Bigger means resources, more connections in emerging markets, better global networks and the perception of cutting-edge technology, explains Dayle Scher, a research director in the investment management division of TowerGroup, a Needham, Massachusettsbased financial services consulting firm.
The 2007 merger made BNY Mellon, with $23 trillion, by far the worlds biggest custodian, with roughly 47 percent more assets than No. 2 JPMorgans $15.7 trillion, according to Institutional Investors annual global custody ranking. This year firms are ranked by total assets under custody a measure of each banks full-service custody business rather than by global custody assets, the cross-border subset of the business. The table below lists the firms by their 2008 rank, based on assets as of March 31, and shows how they would have fared last year had they been ranked by total rather than global assets under custody. The 2007 rank for BNY Mellon is based on the New York and Pittsburgh-based banks combined custody assets before the merger; BNY Mellon would have outpaced JPMorgan by 27.3 percent.
James Palermo, Boston-based cochief executive officer of BNY Mellon Asset Servicing and former global head of Mellon Asset Servicing, believes custodial clients understood that the BNY Mellon deal was different. Unlike previous consolidations in asset servicing, this was made up of two very large players, he says. In the past youve seen large firms acquiring small players, or the strong buying the weak.
The merger accelerated asset growth by bringing together two pieces of the custody puzzle: Mellons $1 trillion in assets under management and in custody, and BNYs back-office services. The combined firm can cross-sell custody and asset servicing to the respective banks money manager, pension fund and other clients.
Clients apparently accept the bigger-is-better argument. Palermo says BNY Mellon has won mandates from investors at a higher rate than either bank enjoyed on its own. Winning 30 to 40 percent of deals is considered good, he says; BNY Mellon has won 60 percent of those for which it competed in the past year.
Other big custodians are also growing faster than their smaller rivals. For example, custodial assets grew year-over-year at third-place State Street Corp. by 20.8 percent, to $14.9 trillion; at fourth-place Citi by 21.3 percent, to $12.9 trillion; and at fifth-place HSBC Group by 29.6 percent, to $6.3 trillion.
Those figures stand in sharp contrast to the growth rates at smaller operators. No. 8 Northern Trust Co. saw its custody assets increase by only 4.8 percent, to $4 trillion, while No. 12 Brown Brothers Harriman & Co. saw an increase of 14.4 percent, to just under $2 trillion.
Size does not tell the whole story, says Timothy Theriault, president of corporate and institutional services at Chicagos Northern Trust. Our size and our scale are an advantage in this market, because expertise and service are so important to institutional clients that are dealing with increasing regulatory and compliance burdens in an era of market volatility and rapid change, he states. Our size keeps us nimble, so we can quickly develop solutions to help clients respond to events.
Theriault adds that Northern Trusts pretax profit margin of 42 percent for the 12 months ended March 31 is well above the industry average of 31 percent. Also, more than 50 percent of its assets are in global custody, the faster-growing segment of the business. That percentage is higher than at most competitors. Theriault credits the banks having only one technology platform for enabling it to expand into new businesses such as fund administration. As we extend into new areas, our incremental costs are low, Theriault explains. We can add capabilities for clients and reward shareholders at the same time.
Northern Trust says it allocates roughly $395 million to technology each year, far less than the $650 million reported by BNY Mellon and JPMorgans $600 million, but Theriault points out that the dollars spent on technology may be misleading because it costs less to maintain and expand a single, integrated platform than multiple systems. He says the airline industry provides an apt comparison. United may be the biggest, but does it have scale? he asks. No, Southwest does. It uses one kind of airplane around the world. We use the Southwest model.