Bloomberg News

BNY Mellon Earnings Climb 4.7% on Rising Investment Fees

October 19, 2011

(Updates shares in seventh paragraph.)

Oct. 19 (Bloomberg) -- Bank of New York Mellon Corp., the world’s largest custody bank, said third-quarter earnings rose 4.7 percent on higher asset fees and said it will fight lawsuits over foreign-currency trading seeking “huge sums.”

Net income rose to $651 million, or 53 cents a share, from $622 million, or 51 cents, a year earlier, BNY Mellon said today in a statement. Analysts had expected the New York-based company to earn 52 cents a share, according to the average of 11 estimates in a Bloomberg survey.

“The results were quite decent in light of the conditions in the capital markets in the third quarter,” Gerard Cassidy, an analyst with RBC Capital Markets, said in a telephone interview from Portland, Maine.

The Federal Reserve’s decision to keep its main lending rate close to zero affects BNY Mellon by eroding margins on lending and forcing the bank to waive fees on money-market funds. The 14 percent decline in the Standard & Poor’s 500 Index during the third quarter reduced the revenue the bank can collect on assets it manages and services for investors such as pension funds and hedge funds.

BNY Mellon, which has been sued over the way it charges clients for foreign-exchange trading, defended its practices in a conference call today and said it will contest the allegations.

“We will not be coerced into paying huge sums,” said Chief Executive Officer Gerald L. Hassell.

BNY Mellon fell 1.2 percent to $19.54 at the close in New York. The stock has fallen 35 percent this year, compared with the 26 percent decline by the 19-company Standard & Poor’s asset managers and custody bank index.

Foreign-Exchange Revenue

Assets under custody and administration rose to $25.9 trillion from the same quarter a year ago, a 6 percent increase the bank attributed to new business. Assets under management rose 5 percent to $1.2 trillion.

Asset levels in both categories fell from the end of the second quarter because of lower stock prices, the bank said in its statement.

Foreign-exchange revenue in the third quarter totaled $221 million, up 38 percent from a year ago as a result of increased volatility. The bank’s net interest margin, the difference between what it pays on deposits and receives on loans and investments, narrowed to 1.3 percent from 1.7 percent a year earlier.

The decline in net interest margin was exacerbated by institutional investors, nervous about the fight over raising the debt ceiling in the U.S., depositing more cash with the bank early in the third quarter, Hassell said. The surge in “hot money” has subsided, he said.

Kelly’s Departure

Hassell, 60, assumed the top job after Robert P. Kelly stepped down in “mutual agreement,” with the board. Kelly left “due to differences in approach to managing the company,” the bank said in a statement at the time, without explaining what those differences were.

In a conference call with investors in July, Kelly said rising costs for pensions, compensation, health care and legal bills were hurting profits. He said the bank would move people to cheaper locations, consolidate its real estate holdings and cut its procurement budget. The bank said Aug. 10 it planned to cut 1,500 jobs or 3 percent of the workforce.

“The firm’s focus under the new leadership could shift to more aggressive cost management and business rationalization,” Alexander Blostein, an analyst at Goldman Sachs Group Inc. in New York, wrote in a note to clients on Aug. 31.

Hassell said today the bank would speak more about cost savings when it addresses analysts in November.

BNY Mellon was hit with separate lawsuits on Oct. 4 by the U.S. Attorney’s Office in Manhattan and New York Attorney General Eric Schneiderman over the way it charges certain customers for handling foreign-exchange transactions.

State Street

The bank “has engaged in a multipronged campaign of deception,” the state and the City of New York said in their complaint. The attorneys general in Florida and Virginia sued the bank in August over the same issue.

“We feel very strongly that the lawsuits against us are unwarranted and flat out wrong on the facts and the law,” Hassell said today on the conference call. The bank has not lost clients because of the suits and trading volumes in standing instruction, the practice that the litigation targets, climbed over the past two years, Hassell said.

State Street Corp., the third-largest custody bank, was criticized in an Oct. 16 letter by billionaire investor Nelson Peltz, who said the bank’s management had done a poor job reducing costs and increasing returns for shareholders. Peltz’s Trian Fund Management LP owns about 3.3 percent of Boston-based State Street shares, the firm said.

Custody banks keep records, track performance and lend securities for institutional investors. BNY Mellon and State Street also manage investments for individuals and institutions.

--Editors: Steven Crabill, Larry Edelman

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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