Publicly traded financial services firms that provide global custody saw revenue derived from securities lending decline in the quarter and year ended Sept. 30, while assets under custody and administration rose.
State Street Corp., Boston, had securities lending revenue of $74 million as of Sept. 30, a 43.5% drop for the quarter and down 18.7% from a year earlier, according to its third-quarter earnings statement issued Oct. 22.
Northern Trust Corp., Chicago, reported in its Oct. 16 earnings statement that its securities lending revenue was $22.7 million, down 5% for the quarter and 27% below a year earlier.
Bank of New York Mellon Corp., New York, which includes securities lending under overall investment services fees, reported Oct. 16 that while those fees were $1.7 billion, unchanged from June 30 but 4% higher than the year-earlier quarter, its securities lending revenue was down.
Securities lending revenue can be affected by seasonal issues, as cited by State Street for its third-quarter decline. But Robert Lee, equity analyst at Keefe, Bruyette & Woods Inc., New York, said securities lending in general has been declining since the 2008-2009 financial crisis. Over time, the decline has hurt earnings of State Street, Northern Trust and BNY Mellon, firms he analyzes.
“Securities lending has been historically profitable for all three. But recently it's also been a revenue headwind. It's been a profitable business but also a shrinking business. It's harder to generate revenue now.”
Mr. Lee said revenue from securities lending has declined in the past five years for two reasons. One is a decline in demand, paralleling the general decline in all kinds of lending; the other is a low-interest-rate environment that has reduced the returns obtained through securities lending.
“At the end of the day, demand is out of (the firms') control,” he said. “For one thing, people are going to have to want to borrow securities, and for the other, rates are rates. These companies can't just say 'I want to double my securities lending revenue over the next year' and then go out and make changes to do it. If rates don't change, they'll all be hurt by this.”
The business “has been probably bouncing along the bottom for a while,” he added. “I mean, how much lower can rates go?”
Of the three firms he follows, Mr. Lee said BNY Mellon probably has been least affected by the decline in securities lending “just because it's a smaller revenue item ... but it's not nearly the revenue item it's been for all three.”
For assets under custody and administration:
- BNY Mellon reported a combined $27.4 trillion as of Sept. 30, an increase of 5% for the quarter and 4% higher than the third quarter of 2012;
- State Street, $26.033 trillion, up 1.1% from the second quarter and up 11.1% from the third quarter of 2012; and
- Northern Trust, $5.237 trillion, 5% higher than the second quarter and 10% higher than the third quarter of 2012.
Mr. Lee said unlike reports on assets under management — where increases would be parallel with increases in fees — a rise or decline in quarterly assets under custody and administration is always reflected in revenue and earnings numbers.
“Revenue generated from custody relations is not driven by asset levels but by the number of transactions, for example. … You want to see the assets grow over time, but for a quarter it's hard to say what the immediate effect is.”
One of the problems with gauging the effects of AUA gains is that not all firms report the numbers the same way, and few draw direct relationships between those assets and revenue. State Street and Northern Trust, for example, break out their assets under custody and administration into separate line items, while BNY Mellon combines them.
“It would be great if firms gave you better insight into the proportion of assets under custody to revenue,” Mr. Lee said.
Among other financial services firms that have reported quarterly earnings, J.P. Morgan Chase & Co., New York, had $996 million in securities services revenue, an 8% fall for the quarter but an increase of 3% from a year earlier. Citibank, New York, had securities and fund services revenue of $668 million, down 8% from the second quarter and unchanged from the previous year.
For assets under custody, J.P. Morgan Chase had $19.736 trillion, up 4% for the quarter and 8% from the third quarter 2012, while Citibank had $13.9 trillion, up 4% and 9%, respectively.
