STT State Street Corporation

By Emily Glazer and Justin Baer 

J.P. Morgan Chase & Co. struck a deal to be the custodian for more than $1 trillion of BlackRock Inc.'s assets, poaching the business from State Street Corp., the companies confirmed Wednesday.

J.P. Morgan will spend around two years bringing the assets into its existing $20.5 trillion platform, the bank said. That may elevate the New York bank to the No. 2 player in the business, second to Bank of New York Mellon Corp., which has an estimated $28 trillion assets under custody, a person familiar with the matter said. Bank of New York Mellon doesn't break out this figure publicly.

State Street's assets under custody were $21.7 trillion as of Wednesday when it reported fourth-quarter earnings, though it is unclear if the change was reflected in the most recent quarterly numbers. State Street noted in an earnings slide presentation Wednesday that BlackRock had moved some of its assets "as a result of a decision to diversify service providers," but remains a client of the bank.

J.P. Morgan is likely to garner roughly tens of millions of dollars in annual fees in one of the largest-ever custody deals. The sticky business is becoming rare in banking where firms have been cutting costs to boost revenues in a low-interest-rate environment. These types of contracts usually don't come up for bid for years.

BlackRock manages $5.1 trillion in assets as of Dec. 31, all of which are serviced by third-party custodians, according to the firm.

"Many of BlackRock's clients will experience cost savings through decreased operating expenses at the fund level," said Derek Stein, head of BlackRock's business operations and technology. "The expansion of our custodial relationship with J.P. Morgan reflects its attractive value proposition for these services while still allowing BlackRock to maintain a diverse roster of fund service providers."

The custodian business, where banks hold, administer and provide evaluations of money for money managers and other clients, is one J.P. Morgan has been growing.

The deal "expands our relationship with BlackRock and is a validation of the investments we've made and the resources we've added to the custody and fund services business," said Daniel Pinto, head of J.P. Morgan's corporate and investment bank.

In the bank's annual Investor Day presentation, corporate and investment Mr. Pinto said the custody and fund services business is among the most important -- and one he has personally spent a lot of time on.

And it helps the bank with its client relationships. There is a 95% overlap its investment banking and market businesses, Mr. Pinto said during the February presentation. The bank's assets under custody have grown 18% in the past five years, he said.

"It's a very good, very stable earning business," Mr. Pinto said at that time.

Fielding repeated questions from analysts on State Street's relationship with BlackRock, State Street Chairman and Chief Executive Joseph Hooley said Wednesday during a conference call that the asset manager remained a key client of the trust bank. State Street will still serve as the custodian on BlackRock exchange-traded and mutual funds, as well as assets with institutional investors, he said.

Mr. Hooley said BlackRock's growth led to discussions over the need to bring in another custodian. "While not our first choice, we appreciate where they were coming from," Mr. Hooley said.

Many asset managers, he pointed out, are shifting to fewer custodial banks in a bid to lower costs and simplify their operations. The BlackRock move, he said, is "very unusual -- but there aren't a lot of ($5.1 trillion) managers."

The loss of BlackRock trust business will begin to affect State Street's fee revenue later this year, he said.

Write to Emily Glazer at emily.glazer@wsj.com and Justin Baer at justin.baer@wsj.com

(END) Dow Jones Newswires

January 25, 2017 11:53 ET (16:53 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.