Bank of New York Mellon: Largest Player in Sticky Custody Business

Dave Sather presented his in-depth investment thesis on Bank of New York Mellon (NYSE: BK) at Wide-Moat Investing Summit 2017.

BNY Mellon is a global investments company and the largest custodian bank in the world, with $27+ trillion in assets under custody. The custodian bank serves as a backbone to the world’s financial markets, servicing 78% of the Fortune 500. Its businesses benefit from global growth in financial assets as well as the continued globalization of capital markets. Because of its long history, dating back to 1784, and wide reach across markets, BNY Mellon is a widely recognized name in the custody space. It has been able to build a moat around its brand, economies of scale, and switching costs. Yet, with ~15% global market share in the asset custody business, there is still room for growth. This business does not care who wins the active vs. passive management argument—as long as securities transactions are occurring and there is a need to store assets for safe-keeping, BNY Mellon will have a place at the table. For the past decade, banks across the world have been stymied by the “zero interest rate policy”, and BNY Mellon is no different in this sense. As the Federal Reserve continues to slowly raise the Fed Funds rate, Bank of New York stands to be a direct beneficiary. Trading at 15 times earnings, BNY Mellon is sitting at its ten-year median valuation point but with catalysts to the upside, which include a ~50% increase in net interest margin over the next three years as the Fed pushes up rates. While not a sexy start-up, continued share repurchases of ~3% of outstanding shares annually should help EPS to grow at least 8-10% over the next several years. A conservative DCF suggests that we can realistically look forward to 10%-20% annualized returns as expected margin improvements take hold.

About the instructor:

Dave Sather is president of the Sather Financial Group, Inc, a “fee-only” financial planning and investment management firm which manages approximately $440 million in client assets. Dave was raised in El Paso, Texas and received his B.A. in Business Management from Texas Lutheran University and received his M.B.A. from Texas A&M University. He has spent the past twenty years in the financial analysis, investment and banking industries. Prior to starting Sather Financial, he worked for PaineWebber and served as the head of portfolio management for First Victoria National Bank’s Trust Department and oversaw the bank’s brokerage operations. Dave also serves as an adjunct professor in the Business program at Texas Lutheran University, is a member of the schools Executive Advisory Council and serves on the schools Investment Committee. Additionally, he is a director of Business Bank of Texas. He and his wife, Carol, live in Victoria, Texas.