BlackRock’s Secret to Strong Margins in 4Q16



Improving operating margins

In its 4Q16 earnings release on January 13, 2016, BlackRock (BLK) reported a 1% rise in total revenues on a YoY (year-over-year) basis. Notably, the company’s operating expenses fell 4% YoY to ~$1.7 billion in 4Q16. Specifically, expenses fell $61 million due to lower general and administrative expenses as a result of strong expense discipline.

BlackRock’s adjusted operating margin rose 270 basis points to 42.4% on spending cuts, as product-wise competition has lead to lower fees and active management didn’t generate higher performance fees. BlackRock faces competition in the ETF space from Vanguard, and State Street (STT) and Vanguard. The company is also taking advantage of its scale in an effort to spread and reduce costs to maintain healthy operating margins.

BlackRock posted a net income margin of 28.4% in 2016, as compared to the following margins of its peers in 2015:

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

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

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General expenses decline

BlackRock’s general and administrative expenses fell $55 million in 4Q16, mainly due to lower marketing and promotional spend. In 4Q15, the company also saw $23 million in transaction-related expenses.

The company’s compensation expenses fell $2 million to $987 million in 4Q16, however, increased $18 million sequentially, mainly due to higher incentives driven by operating performance and growth.

Notably, the asset management industry has been facing difficulty in generating alpha or superior returns, and as a result, investors have been opting for passive fund offerings to avoid additional costs.

In the next part of the series, we’ll investigate BlackRock’s shareholder payouts.


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