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Morningstar | BNY Mellon Faces Industrywide Structural Headwinds and Cyclical Rate Headwinds

BNY Mellon is one of the two largest global custodian banks in the world, with over $32 trillion in assets under custody and administration. BNY is involved in the investment lifecycle at essentially every step of the way, serving corporations, investors, and institutions. This includes the settlement and storage of assets, recordkeeping, issuance, back-office solutions for asset managers, triparty repurchase clearing, and much more. BNY also has an investment-management segment involved in asset and wealth management. While asset servicing can be a more commoditylike business, scale, high barriers to entry, and the stickiness of clients have helped the largest firms--and BNY Mellon is the largest of the large--to build and sustain wide economic moats.We think BNY Mellon will continue to benefit from tailwinds as increasing regulation is encouraging asset managers to outsource their back-office operations for greater security and oversight and as interest rates increase. BNY should also see additional growth in triparty repo for government securities as JPMorgan has left the business, leaving BNY as the sole player. However, significant headwinds, including increased pricing pressure in asset servicing, increased pricing and performance pressure within asset management, and deposit and rate headwinds will all pressure growth and returns as well. We expect BNY to have to continue to invest in, upgrade, and consolidate internal platforms, keeping pace with competitors, attempting to offset these pressures.BNY has been criticized in the past for poor cost control and poorly integrated acquisitions. While we believe some of these criticisms were justified, a poor macro environment, particularly the financial crisis and low interest rates, did not help. Even so, with the exception of a single year, returns on tangible equity have exceeded 15% consistently for more than 15 years. We expect that CEO Charles Scharf will bring a renewed focus on technological improvements, delayering management, cost control, and revenue growth and that returns on tangible equity will only improve as BNY Mellon remains the steady, wide-moat firm it has been for some time.