Asset manager BlackRock Inc. on Wednesday moved more than $1 trillion in client assets from State Street Corp. to JPMorgan Chase as it seeks to cut costs by putting pressure on vendors.
The move is part of BlackRock's strategy to exact lower fees, according to a person familiar with the matter. JPMorgan said the deal was one of the largest shifts of custody assets ever. Custody banks keep records, track performance and lend securities for institutional investors. They also manage money for individuals and institutions.
BlackRock, the world's largest asset manager, found a partner in JPMorgan, which has been growing its custody business and now manages $20.5 trillion in assets. The bank has invested in automation technology that helps it offer services more cheaply, said another person with knowledge of the situation. The bank is expected to make tens of millions of dollars in annual fees from the deal.
"Many of BlackRock's clients will experience cost savings through decreased operating expenses at the fund level," Derek Stein, senior managing director and head of business operations and technology at BlackRock, said in an emailed statement Wednesday.
BlackRock has made no secret that it planned to put more pressure on vendors. President Rob Kapito said in a conference call last year that it would seek concessions as it tries to keep a lid on expenses.
JPMorgan's corporate and investment bank chief Daniel Pinto has said he was focusing on the custody business because of its profit margins and steady fees. One priority is improving efficiency through automation technology, he said in a February presentation. That has helped the business generate margins of greater than 25 percent.
Pinto said in a Wednesday statement that the deal is a "validation of the investments we've made and the resources we've added to the custody and fund services business."
The bank has increased business with existing custody clients by 10 percent over the last 12 months, JPMorgan said in a statement Wednesday.
State Street investors saw the move as a blow. The company's shares fell $2.72, or 3.4 percent, to close Wednesday at $77.80.
State Street Chief Executive Officer Jay Hooley said Wednesday that BlackRock approached the Boston-based custody bank as it sought to diversify its custodians. Hooley said that as BlackRock grew into a $5.15 trillion money manager it decided it needed another partner. The shift isn't indicative of a trend in the industry because most companies are looking to use fewer providers, Hooley said on the company's earnings conference call.
"We appreciated where they were coming from," Hooley said. "It's a one-off adjustment for BlackRock to get better diversified."
State Street had assets under custody and administration of $28.8 trillion as of the fourth quarter. It said in a presentation Wednesday that it would remain a service provider to BlackRock even after the move. Bank of New York Mellon Corp., the largest custody bank, reported $29.9 trillion in assets under custody and administration.
Price competition is fierce among the top players in the industry. Improvements in technology are driving servicing costs lower and customers are demanding those savings be returned to them, Richard Bove, an analyst with Rafferty Capital Markets, said in an interview Wednesday.
"It is a significant loss at a time when State Street's fees are already under pressure," said Bove.
JPMorgan expects to take over administration of the assets during the next two years.
"Shifts of this size are pretty rare," Jonathan Watkins, editor of Global Custodian, a London-based publication that covers the industry, said in a telephone interview. "Big managers tend to keep these custody relationships in place for decades."
Business on 01/26/2017