BlackRock Adds Assets across Categories, Regions in 3Q17

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Part 5
BlackRock Adds Assets across Categories, Regions in 3Q17 PART 5 OF 8

Could There Be a Further Upside for BlackRock’s Operating Margins?

Augmenting margins

BlackRock (BLK) reported 14% growth in total revenues in 3Q17. Its operating expenses rose 13%, resulting in 15% growth in operating income. The company’s expenses rose to $1.84 billion in 3Q17, compared with $1.63 billion in 2Q16, mainly due to a rise in compensation, distribution and servicing costs, direct fund expense, and general spending.

Could There Be a Further Upside for BlackRock&#8217;s Operating Margins?

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On a YoY (year-over-year) basis, BlackRock’s adjusted operating margin rose 20 basis points to 43.1%, reflecting an industry-wide trend of expense cutting. Overall, the rise in broad markets (SPX-INDEX) (SPY) for 3Q17 resulted in improved performance income for its various fund offerings.

As a result, compensation and direct fund expenses have increased consistently over the past few quarters.

Notably, peers (XLF) JPMorgan Chase (JPM), State Street (STT), and Goldman Sachs (GS) posted operating margins in the range of 25%–40%.

Rising general and other expenses

In 3Q17, BlackRock’s general expenses rose $51 million from 3Q16, mainly due to portfolio services, professional services, a rise in foreign exchange remeasurement expense, technology enhancements, and fair value adjustments. The company’s compensation expenses rose $119 million to $1.09 billion in 3Q17 on a higher number of employees, higher assets under management, and improved performance income.

BlackRock’s direct fund expenses rose $34 million to $234 million, and general expenses rose $51 million to $363 million. Its expenses on promotions fell sequentially, reflecting higher interests in markets from retail and institutional players.

BlackRock’s expense management has been stable over the past few quarters, resulting in operating margins in the range of 41%–43%. The company’s margins are expected to stabilize in this range as it makes major curbs on excess spending.


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