Summary
- BlackRock looks to diversify custodians for c. $1 trillion in iShares assets currently held at State Street.
- However, the earnings impact is likely to be limited considering the limited group-level contribution and the low fees associated with the AUM.
- A sooner-than-expected resumption of the capital return could drive a c.11% yield.
News of BlackRock's (BLK) plans to hire additional custodians for the ~$2 trillion ETF business currently housed at State Street (STT) should have a negligible top and bottom line impact. While the EPS impact to STT will be limited, it is a sign of the times, and pricing across the custody business could continue to be pressured. Nonetheless, I think the STT story has plenty of legs to stand on, with a host of levers available, from expense flexibility to capital returns considering the health of its capital base and limited credit risk. With STT shares down to near-trough valuations at c.10x-11x EPS and a c.11% yield on offer upon the resumption of its capital return, I like STT shares at these levels.
BlackRock Looks to Diversify Custodians for iShares Assets
According to recent news reports, BlackRock is looking to hire multiple additional custodians for its US and Irish iShares ETF businesses, with a total of c.$2 trillion in iShares assets under management (AUM) currently custodied at STT at risk. This makes sense for BlackRock, as it looks to diversify concentration risks following the rapid growth in iShares AUM in recent years.
(Source: Pensions & Investments)
There is some precedent for this, as in the past, BlackRock similarly moved c.$1 trillion in assets from STT to JPMorgan (JPM) in 2017. Nonetheless, STT remained a critical partner then, as it will be in the case of the iShares shift this time around, with BlackRock suggesting that its plan is to keep a portion of iShares assets with STT. Interestingly, STT has also been included in the requests for proposal (RFP) for the custody of these assets.
Limited Revenue and Earnings Impact
In a worst-case scenario, BlackRock would be moving the full $2 trillion of iShares AUM to another provider. This would see a c.1-2% hit to EPS, assuming a 0.5-1bps fee rate and no associated expense cuts. If BlackRock were to split the $2 trillion, on the other hand, we should see an even smaller hit to EPS. In a best-case scenario where BlackRock hires a second custodian for additional administrative services for the iShares AUM, the EPS impact should be negligible.
At this stage, it is unclear what % of assets will be moved, but ultimately, I think only a portion of the c.$2 trillion will be moved considering the limited number of providers able to service ETFs at a similar scale to STT. Additionally, shifting AUM within the same asset class or geography across multiple service providers is likely inefficient, and therefore, it seems more likely that the assets moved will pertain to a certain geography or asset class to allow BlackRock to maintain scale benefits.
