We recently coined the phrase ‘the race to $50 trillion’ here at Global Custodian to reflect the ever-accelerating growth in assets under custody and administration (AUC/A) among the largest asset servicers in the world.
Both State Street and BNY Mellon have been hurtling towards this milestone at an alarming pace where AUC/A seemed to be growing in double-digit numbers with each passing quarter.
According to our estimations based on recent growth rates, both banks were in line to hit the $50 trillion mark somewhere within the first nine months of this year. However, as the headline reads, something has happened to the AUC/A of the largest custodians during Q1 that hasn’t happened in a very long time – they have fallen!
Use of the word ‘unprecedented’ has risen exponentially since March 2020 to describe Covid-19, the collapse of Archegos Capital and the war in Ukraine, but it’s the latter event and its domino effect across the valuation of assets which appears to have taken its toll on AUC/A across the largest four custodians.
Compared with Q4 2021 the AUC/A of BNY Mellon, State Street and Citi – and the AUC of JP Morgan – have dropped. Now, in their quarterly earnings, each of these banks have made year-on-year comparisons with Q1 2021 to reflect an uptick, but I would argue that given AUC/A isn’t seasonal, the benchmark has to be the prior quarter.
None of the quartet referred to the war in Ukraine and its far-reaching effects on the global markets as impacting AUC/A; however, it’s evident that the valuation of assets has dropped because of the invasion, ensuing sanctions and the freezing of some assets.
Because of this ‘unprecedented’ change in direction of travel for AUC/A, it’s time to revisit two narratives which have emerged in recent years. The first is ‘the race to $50 trillion’. This is still likely to occur for either BNY Mellon or State Street by the end of the year as the majority of financial hits from the Ukraine have likely taken place among their clients. BNY Mellon’s AUC/A is growing around 10% each year, therefore given its current total is $45.5 trillion, the landmark figure could be hit by the end of the year. For State Street, an additional $5.4 trillion from BBH Investor Services, plus annual growth, added to its $41.7 trillion, will also position it close to $50 trillion.
The second trend we have tracked over the past few years is the complete lack of correlation between AUC/A and revenues, with the former rising at a rapid pace and the latter relatively flat.
As custody business models have faced headwinds in terms of increasing profitability and revenues, their AUC/A have continued to increase, suggesting that custodians are being asked to do more for less.
But in Q1, despite the drops in AUC/A, Citi, JP Morgan and State Street all boasted revenue increases in securities services. BNY Mellon is an exception to the trend due to its depositary receipts business being directly impacted by the war in Ukraine.
Granted, this is just one quarter, but what we saw in the numbers has provided a new plot in the ongoing story of modern-day custodians trying to figure out their place in an increasingly commoditised business, in a low interest rate environment that is set for digital transformation and new challenges/opportunities.