The monstrous rally in the financial markets over the past year has done wonders for Bank of New York Mellon (BK), the world’s largest “custody” bank. Custody refers to the asset administration and trust services Bank of New York provides to money managers in a huge range of asset classes and countries.
Global custody represents an intensely concentrated market, with six banks handling more than 75 percent of all financial assets around the world, according to Morningstar. Obviously there are large barriers to entry. Customers aren’t keen on changing their trust bank, so that provides Bank of New York Mellon with a huge advantage.
It also has the world’s biggest business in providing trust-related services to issuers of stocks and bonds. The bank faces no large competitors in this space, so it offers almost guaranteed profits.
Put all this together, and Bank of New York Mellon stock offers a compelling opportunity.
The bank’s net income rose 12 percent in the first quarter to $625 million from $559 million a year earlier, helped by the raging bull market in stocks. Revenue climbed 8.5 percent to $3.65 billion.
Assets under custody and administration gained 14 percent to $25.5 trillion. That allowed the bank to overcome a 24 percent drop in foreign exchange and other trading revenue. Net interest income also dipped 4 percent as near-zero short-term interest rates weighed on Bank of New York Mellon’s money-market and bond investments.
Moving Toward New Growth
Overall, the news was obviously good.
“Over the past year, unlike many, we continued to grow revenue and earnings despite the challenging environment, and did so with a clean balance sheet,” said Bank of New York Mellon CEO Robert Kelly. “A fundamental strength of our business model is the ability to rapidly grow capital and generate a high return on it.”
Analysts agree. Erik Oja of Standard & Poor’s has a four-star buy rating on the stock. While net interest income was weak, “we see BK moving away from net interest income, towards fee revenues,” he writes.
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