Three custodian banks face ratings review
03 July 2013 New York
Image: Shutterstock
BNY Mellon, State Street and Northern Trust are facing reviews of their long-term ratings because of narrow margins in core custody services and an over reliance on ancillary services such as securities lending, according to Moody鈥檚.
The rating agency placed the long-term ratings of the banks, including their bank financial strength ratings, all long-term senior debt, subordinated debt, and preferred stock ratings, on review for downgrade on 2 July.
The ratings review will focus on the long-term profitability challenges facing BNY Mellon, State Street and Northern Trust.
鈥淭hese profitability challenges are driven by the aggressive pricing of all three banks' core custody products and services, such that their overall fee revenue is roughly similar to their total expenses. The review will also examine the banks' ability to generate more revenue from custody-related services and cut costs,鈥� said Moody鈥檚 in a statement.
All three banks have 鈥渁 strong, sustainable franchise in that their core custody businesses benefit from significant barriers to entry as well as favourable secular trends,鈥� said Moody鈥檚.
On top of this, they have significant asset management franchises. 鈥淭hese durable businesses, as well as the banks' liquid balance sheets and good capitalisation, underpin their very high ratings.鈥�
As a result, any downgrades 鈥渁re likely to be limited to one notch鈥�.
Despite each bank鈥檚 significant market share, 鈥減ricing in the core custody business is very competitive, resulting in narrow margins鈥�, said Moody鈥檚.
鈥淭his makes the banks reliant on revenue from ancillary services to add to profitability, but these revenue sources have come under pressure. Specifically, net interest income has been constrained by low interest rates, foreign exchange revenue has been hurt by lower volatility and increased scrutiny of pricing, and securities lending revenue has declined due to lower demand.鈥�
鈥淭he review will consider if the banks are overly dependent on ancillary services to generate a healthy level of profitability.鈥�
Moody鈥檚 added that as interest rates rise, the banks鈥� earnings pressures will recede, but 鈥渢he demonstrated vulnerability of their business models to protracted low interest rates constitutes a concentration risk鈥�.
鈥淭his concentration risk may not be consistent with the business model resilience expected for a very high 鈥榓a3鈥� standalone credit assessment.鈥�
The changing asset mixes of BNY Mellon, State Street and Northern Trust will also be a factor in the review, because each has large securities holdings that could be affected by Basel III capital requirements.
BNY Mellon and State Street declined to comment. Northern Trust is yet to respond to a request.
The rating agency placed the long-term ratings of the banks, including their bank financial strength ratings, all long-term senior debt, subordinated debt, and preferred stock ratings, on review for downgrade on 2 July.
The ratings review will focus on the long-term profitability challenges facing BNY Mellon, State Street and Northern Trust.
鈥淭hese profitability challenges are driven by the aggressive pricing of all three banks' core custody products and services, such that their overall fee revenue is roughly similar to their total expenses. The review will also examine the banks' ability to generate more revenue from custody-related services and cut costs,鈥� said Moody鈥檚 in a statement.
All three banks have 鈥渁 strong, sustainable franchise in that their core custody businesses benefit from significant barriers to entry as well as favourable secular trends,鈥� said Moody鈥檚.
On top of this, they have significant asset management franchises. 鈥淭hese durable businesses, as well as the banks' liquid balance sheets and good capitalisation, underpin their very high ratings.鈥�
As a result, any downgrades 鈥渁re likely to be limited to one notch鈥�.
Despite each bank鈥檚 significant market share, 鈥減ricing in the core custody business is very competitive, resulting in narrow margins鈥�, said Moody鈥檚.
鈥淭his makes the banks reliant on revenue from ancillary services to add to profitability, but these revenue sources have come under pressure. Specifically, net interest income has been constrained by low interest rates, foreign exchange revenue has been hurt by lower volatility and increased scrutiny of pricing, and securities lending revenue has declined due to lower demand.鈥�
鈥淭he review will consider if the banks are overly dependent on ancillary services to generate a healthy level of profitability.鈥�
Moody鈥檚 added that as interest rates rise, the banks鈥� earnings pressures will recede, but 鈥渢he demonstrated vulnerability of their business models to protracted low interest rates constitutes a concentration risk鈥�.
鈥淭his concentration risk may not be consistent with the business model resilience expected for a very high 鈥榓a3鈥� standalone credit assessment.鈥�
The changing asset mixes of BNY Mellon, State Street and Northern Trust will also be a factor in the review, because each has large securities holdings that could be affected by Basel III capital requirements.
BNY Mellon and State Street declined to comment. Northern Trust is yet to respond to a request.
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