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Morningstar | BNY Mellon a Wide Moat Company But Revenue Headwinds Persist

With over $30 trillion in assets under custody or administration (AUC/A), Bank of New York Mellon is essentially tied with State Street as the largest custodian by assets. While core custody can be an undifferentiated offering, scale and the stickiness of clients have helped the firm generate double-digit returns on tangible equity. BNY Mellon also has a variety of other business such as Pershing (RIA custody and broker/dealer clearing), a mutual fund sub-accounting platform, an ADR issuer servicing solution, and a tri-party repo platform which does differentiate the company in our view. In addition to its investment servicing business, the firm generates about one quarter of its revenue from an extensive investment management business that manages over $1.8 trillion in assets. Given the lower switching costs, we’d consider the asset management division to have a narrower moat than its investment servicing division. BNY Mellon has faced criticism for lack of cost control and integration failures in the Mellon merger. While we acknowledge some of the criticism, we believe CEO Charles Scharf, who took over in 2017, brought a renewed focus to cost control and we’d note that the firm consistently sees 15%-plus returns on tangible equity. We expect increased client concentration and continued fee pressure on asset managers to contribute to pricing pressure at BNY Mellon. That said, we expect the firm will continue to deliver these high returns on tangible equity as share repurchases and expense control offset some pricing headwinds.