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BNY Mellon Isn't the Underdog It Seems

Why we see it as today's most attractive trust bank.

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Custody banks have suffered in recent years as low interest rates and clients' risk aversion have weighed on revenue. Banks have responded by cutting costs--though some more than others--but shareholder returns have remained stubbornly subpar. Despite this, we think the wide economic moats of custody banks are firmly intact, and we argue that returns will improve significantly as economic conditions normalize. We expect  Bank of New York Mellon (BK) to benefit disproportionately from improving conditions, and we see it as the most undervalued of the custody banks. Moreover, we think recent criticisms regarding a bloated cost structure and slow growth and calls to break up the bank are overdone and built on misunderstandings of industry dynamics.

Custody banks, also known as trust banks, take custody of and provide safekeeping for assets belonging to clients like mutual funds, pension funds, insurance companies, alternative asset managers, and wealthy individuals. Custody banks typically also administer these assets, providing services such as arranging and recording settlement of any asset sales or purchases, collecting and recording income from the assets, such as dividends or interest payments, and administering corporate actions, such as stock splits and company mergers. These client assets are typically known as assets under custody or assets under administration, depending on the specific arrangement, or a combination.

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Erin Davis does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.