A Game of Scale: State Street & Mizuho Financial Group

Good morning, and welcome to Global Custody Pro.

This article covers the State Street and Mizuho deal, announced on February 28, 2025, exploring the game of scale in global custody and the potential for similar deals in the next year. If you’ve got any feedback, I’d love to hear it - reply to this email and let me know.

The State Street and Mizhuo Deal

At the UBS Financial Services Conference held in mid February, State Street CEO Ron O’Hanley responded to a question asked about M&A as part of State Street’s strategy: “In terms of M&A, we've been very clear on this, which is M&A is not a strategy. We will do M&A if it helps us propel our strategy again in a way that would be better than what the organic solution would be.”

Just a few weeks later, on Friday 28th February 2025, State Street and Mizuho Financial Group announced a deal that will see State Street buy Mizuho’s global custody business for assets outside of Japan. Does that mean State Street sees a much better outcome from this deal than organic growth? Maybe he was thinking more of technology M&A vs building internally, but it’s an interesting comment in light of the subsequent deal announcement.

Through this deal, State Street will acquire Mizuho’s ex-Japan global custody business, including over $580 billion in assets under custody (AuC) and over $24 billion in assets under administration (AuA).

The transaction is set to close by Q4 2025, demanding significant effort from both teams to integrate this large asset base, underscoring the operational challenges of scaling in global custody. Mizuho will retain its domestic custody business in Japan and focus on that business for its institutional clients.

Who Is Involved?

State Street is one of the world’s largest global custodians. State Street’s Q4 2024 assets under custody and/or administration were over $46.6 trillion, and it generated over $1.2 billion in Q4 asset servicing income from custody fees. In Q4 2024, State Street had a pipeline of over $2.9 trillion in assets to be onboarded, and won over $1.09 trillion of business in Q4.

Mizuho Financial Group, a major Japanese bank, has improved efficiency (expense ratio down from 64% to 59.4%) and profitability (ROE up from 5.9% to 9.5%) over five years, supporting its shift to focus on domestic custody and divest global custody operations to State Street. It has assets in excess of JPY 285 trillion ($1.91 trillion).

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The Game of Scale In Global Custody

The game of scale in global custody is that the biggest global players win and continue to win. Scale creates a positive flywheel: larger global custodians earn higher margins on core services, enabling platform investments that attract more clients and support higher-margin offerings like FX and securities lending.

State Street’s average incremental servicing income over the last four quarters is 1.77 basis points on new AuC/A wins, though this deal’s specific asset mix and terms may adjust the actual revenue. Applying 1.77 basis points to the $604 billion in new assets yields $107 million in potential revenue, though transition and onboarding costs could offset short-term gains.

This estimated potential revenue is before the extra income from State Street selling products like its technology platform and other value-added services. It also doesn’t include additional net interest margin from any cash brought across to State Street as part of the deal. These are obviously back-of-the-envelope estimates - we’ll have to monitor State Street’s quarterly earnings over the next few quarters to monitor the benefits realisation of this deal.

Despite the massive asset figures involved, the $107 million revenue seems modest. This reflects the tight margins of global custody where scale is critical to offset high fixed costs. That’s because the economics of global custody are all about building and maintaining massive global platforms and processes that need to add more clients to spread the high fixed costs and create an ecosystem that enables cross-selling and upselling.

Global custodians manage securities trades, cash, FX, corporate actions, and securities lending across global markets, each with unique regulations, driving complexity and costs. These platforms demand substantial, ongoing investment to adapt to market, regulatory, and tax changes.

Getting to the starting line in order to earn margin from this platform requires winning net new assets on platform every quarter. Clients will churn out for various reasons - not happy with the price, not happy with the service, just looking for a change, or whatever other reason - but when churn happens in global custody your platform can lose a significant amount of revenue in one transaction.

This means that in order to “get ahead” of natural churn, not only do you need to win deals in size, but embarking on M&A is a natural next step to grow your book of business. If you look at the State Street Q4 results, you can see that over the course of the 2024 year, servicing fees grew 6%. Using the back-of-the-envelope estimate above, the $107 million boosts annual servicing fees by ~2% (based on Q4 2024’s $1.28 billion quarterly fees annualized to $5.1 billion), aligning with a 2.1% estimate after rounding.

In terms of adding scale to the platform, a $604 billion net new add to $47.7 trillion is a 1.27% increase in AuC/A, again, on the scoreboard by Q4 2025. Last year, State Street grew AuC/A by 11% so from that perspective it’s slightly less impressive but another way of thinking about this deal is it adds the same as about 26% of AuC/A wins in 2024 - so there’s a “free quarter” worth of AuC/A growth to open 2025. That’s the game of scale.

Is There More M&A Ahead?

The State Street / Mizuho deal is driven by two trends coming together:

1. The need for global custody platforms to add more assets and scale to their platforms

2. The need for Japanese banks to drive higher returns and focus on core capabilities only to respond to shareholder pressure on performance

The more likely scenario is Japanese banks continuing to focus on higher return activities and streamlining their global operations so they can return more capital to shareholders. Japanese firms in general are coming under enormous corporate governance pressure to improve returns and efficiency.

The global custody business is complex and constantly changing - outsourcing in securities services makes sense for any bank that is sub-scale. The interesting thing in global custody is that “sub-scale” can still be the case when AuC/A is in the hundreds of billions, as shown by Mizuho’s choice to exit their ex-Japan business here. This is because the largest platforms need at least trillions of dollars on their platform. They then require enormous amounts of ongoing and perpetual investment.

I think it’s less likely that massive global M&A deals in the global custody space come to fruition in 2025. While consolidation may continue, large global M&A faces regulatory hurdles, making smaller deals like this one more likely in the next year.

Key Takeaways

• State Street will acquire Mizuho Financial Group’s ex-Japan global custody business

• State Street will grow AuC by $580 billion and AuA by $24 billion in the deal

• The deal is targeting completion by Q4 2025

• State Street effectively gets an extra quarter’s typical platform growth

• Mizuho can simplify its operating model and focus on direct custody in Japan