BlackRock Trends on Higher Operating Margins on Expense Cuts



Expense management for margins

BlackRock (BLK) has had to deal with lower pricing for its offerings as competitors offer ETFs and other passive products at attractive prices. The company saw a 3% fall in total revenues on a YoY (year-over-year) basis in 3Q16. However, its operating expenses fell 4% to $1.6 billion during a similar timeframe.

BlackRock has been working on expense management in a bid to maintain margins in declining fees on a percentage basis. In 3Q16, the company’s expenses fell by $62 million due to lower employee compensation and rewards from restructuring initiatives.


The lower spending resulted in an adjusted operating margin rise of 90 basis points to 44.8%, as product-wise competition has led to lower fees. BlackRock is expected to see 43%–45% margins in the upcoming quarters on continued expense management. The company is facing stiff competition in the ETF space from Vanguard, State Street (STT), and other asset managers and brokerage firms resulting in lower fees.

BlackRock is leveraging its size and global spread in a bid to maintain healthy margins by reducing expenses. The company posted a net income margin of 29.5% in 2015 as compared to the following margins of its competitors:

  • Bank of New York Mellon (BK): 16.9%
  • State Street: 19.8%
  • JPMorgan Chase (JPM): 23.1%

Together, these companies make up 1.9% of the SPDR S&P 500 ETF (SPY).

Rewarding managers

BlackRock’s compensation expenses have been lower in the recent quarters on layoffs, lower performance, and more deployment towards passive funds. In 3Q16, compensation expenses fell by $54 million to $969 million. In comparison to 2Q16, expenses fell $4 million with a decline of $9 million in employee compensation.

Traditional as well as alternative funds have been facing strong competition from passive investment offerings, resulting in lower fees. The shift has been mainly due to a weaker alpha generation by alternatives and active fund managers.

In the next part of the series, we’ll study BlackRock’s rewards for shareholders.

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